Consider carefully the risk factors beginning on page S-10 in this prospectus
supplement.
The offered certificates will represent interests in the trust only and will not
be guaranteed by or represent interests in or obligations of Centex Home Equity
Company, LLC or any of its affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
Filed Pursuant to Rule 424(b)(5)
Registration No.333-69800
PROSPECTUS SUPPLEMENT
(To Prospectus dated March 13, 2002)
$423,000,000
(APPROXIMATE)
CENTEX HOME EQUITY LOAN TRUST 2002-B
[CENTEX LOGO]
Centex Home Equity Loan Asset-Backed Certificates, Series 2002-B
Centex Home Equity Company, LLC
Originator and Servicer
CHEC Funding, LLC
Depositor
We are offering pursuant to this prospectus supplement and
the accompanying prospectus:
<Table>
<Caption>
------------------------------------------------------------------------------------------------------
OFFERED PRINCIPAL FINAL SCHEDULED
CERTIFICATES BALANCE* CERTIFICATE RATE DISTRIBUTION DATE
------------------------------------------------------------------------------------------------------
Class AF-1 $54,800,000 3.580%, subject to an interest rate cap. February 25, 2016
------------------------------------------------------------------------------------------------------
Class AF-2 $31,000,000 4.487%, subject to an interest rate cap. May 25, 2020
------------------------------------------------------------------------------------------------------
Class AF-3 $25,000,000 5.122%, subject to an interest rate cap. June 25, 2026
------------------------------------------------------------------------------------------------------
Class AF-4 $31,800,000 5.896% (or 6.396% for each interest period June 25, 2031
after an affiliate of the servicer first
fails to exercise its clean-up call option),
subject to an interest rate cap.
------------------------------------------------------------------------------------------------------
Class AF-5 $5,000,000 6.334% (or 6.834% for each interest period April 25, 2032
after an affiliate of the servicer first
fails to exercise its clean-up call option),
subject to an interest rate cap.
------------------------------------------------------------------------------------------------------
Class AF-6 $16,317,000 5.910%, subject to an interest rate cap. April 25, 2032
------------------------------------------------------------------------------------------------------
Class MF-1 $10,423,000 6.418%, subject to an interest rate cap. April 25, 2032
------------------------------------------------------------------------------------------------------
Class MF-2 $9,000,000 6.894%, subject to an interest rate cap. April 25, 2032
------------------------------------------------------------------------------------------------------
Class BF $6,160,000 7.112%, subject to an interest rate cap. April 25, 2032
------------------------------------------------------------------------------------------------------
Class AV $191,470,000 One-month LIBOR plus 0.26%, subject to an April 25, 2032
interest rate cap.
------------------------------------------------------------------------------------------------------
Class MV-1 $17,512,000 One-month LIBOR plus 0.66%, subject to an April 25, 2032
interest rate cap.
------------------------------------------------------------------------------------------------------
Class MV-2 $12,843,000 One-month LIBOR plus 1.15%, subject to an April 25, 2032
interest rate cap.
------------------------------------------------------------------------------------------------------
Class BV $11,675,000 One-month LIBOR plus 1.87%, subject to an April 25, 2032
interest rate cap.
------------------------------------------------------------------------------------------------------
Class A-IO notional 6.00% per annum for 20 months on a scheduled November 25, 2003
amount notional amount.
------------------------------------------------------------------------------------------------------
</Table>
* Principal balances (or notional amount) subject to
variance of plus or minus 5%.
THE CERTIFICATES
- Interest and principal on the certificates are scheduled
to be paid monthly on the 25(th) day of the month or, if
the 25(th) day is not a business day, on the next business
day. The first scheduled distribution date is April 25,
2002.
- The offered certificates currently have no trading market.
- The Class A-IO certificates will be comprised of the Group
I A-IO component and the Group II A-IO component. The
Class A-IO certificates do not have a certificate
principal balance but will accrue interest at a rate of
6.00% per annum for 20 months on a scheduled notional
amount as described herein.
- The Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class
AF-5, Class AF-6, Class A-IO and Class AV certificates
will be senior certificates.
- The Class M-1, Class M-2 and Class B certificates of a
group will be subordinate to, and provide credit
enhancement for, the senior certificates of the related
group. The Class M-2 certificates of a group will also be
subordinate to, and provide credit enhancement for, the
Class M-1 certificates of the related group. The Class B
certificates of a group will also be subordinate to, and
provide credit enhancement for, the Class M-1 certificates
and Class M-2 certificates of the related group.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE CERTIFICATES OR DETERMINED IF THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The underwriters listed below will offer the offered certificates from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. Proceeds to the depositor with respect to the offered
certificates are expected to be approximately $427,406,880, excluding accrued
interest, and before deducting issuance expenses payable by the depositor,
estimated to be $700,000. We expect that delivery of the offered certificates
will be made in book-entry form through the facilities of The Depository Trust
Company, Clearstream Banking, societe anonyme and the Euroclear System on or
about March 22, 2002.
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
GREENWICH CAPITAL MARKETS, INC.
SALOMON SMITH BARNEY
March 13, 2002
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered certificates in two
separate documents that provide progressively more detail:
- the accompanying prospectus, which provides general information, some of
which may not apply to your certificates; and
- this prospectus supplement, which describes the specific terms of your
certificates.
YOU SHOULD RELY PRIMARILY ON THE DESCRIPTION OF YOUR CERTIFICATES IN THIS
PROSPECTUS SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the offered certificates in any state where the offer
is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the offered certificates. In addition, all dealers selling the
offered certificates will be required to deliver a prospectus supplement and
prospectus until June 20, 2002.
TABLE OF CONTENTS
<Table>
<Caption>
PROSPECTUS SUPPLEMENT
---------------------
CAPTION PAGE
- ------- -----
Summary.............................. S-1
Risk Factors......................... S-10
Description of the Home Equity
Loans.............................. S-25
Prepayment and Yield
Considerations..................... S-51
Formation of the Trust and Trust
Property........................... S-71
Description of the Certificates...... S-73
Use of Proceeds...................... S-90
Certain Federal Income Tax
Considerations..................... S-90
Certain State Tax Considerations..... S-92
ERISA Considerations................. S-92
Legal Investment Considerations...... S-94
Underwriting......................... S-95
Legal Matters........................ S-95
Ratings.............................. S-96
Index of Defined Terms............... S-97
Annex I.............................. I-1
</Table>
<Table>
<Caption>
PROSPECTUS
----------
CAPTION PAGE
- ------- -----
Prospectus Supplement................ 4
Reports to Holders................... 4
Introduction......................... 5
The Depositor........................ 5
The Seller and the Servicer.......... 5
Description of the Securities........ 13
The Trust Funds...................... 22
Accounts............................. 25
Enhancement.......................... 28
The Agreements....................... 29
Certain Legal Aspects of the Home
Equity Loans....................... 44
Use of Proceeds...................... 51
Federal Income Tax Consequences...... 51
State Tax Consequences............... 74
ERISA Considerations................. 74
Legal Investment..................... 81
Plan of Distribution................. 81
Legal Matters........................ 82
Where You Can Find More Information.. 82
Incorporation of Certain Documents by
Reference.......................... 83
</Table>
ii
SUMMARY
- This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the
terms of the offering of the offered certificates, you should read
carefully this entire prospectus supplement and accompanying prospectus.
- This summary provides an overview to aid your understanding and is
qualified by the full description of this information in this prospectus
supplement and the accompanying prospectus.
- You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Defined
Terms" beginning on page S-97 in this prospectus supplement.
ISSUER
- Centex Home Equity Loan Trust 2002-B.
DEPOSITOR
- CHEC Funding, LLC, a Delaware limited liability company and wholly owned
subsidiary of Centex Home Equity Company, LLC.
ORIGINATOR
- Centex Home Equity Company, LLC, a Delaware limited liability company
(formerly Centex Credit Corporation, a Nevada corporation).
- All of the home equity loans have been originated by the originator, by
an affiliate of the originator or by a broker for simultaneous assignment
to the originator or were acquired by the originator from correspondent
lenders and reunderwritten to comply with the originator's underwriting
standards.
- The originator will sometimes be referred to in this prospectus
supplement as "CHEC".
SELLERS
- Centex Home Equity Company, LLC.
- Harwood Street Funding II, LLC, which is a limited purpose entity and an
affiliate of Centex Home Equity Company, LLC.
SERVICER
- Centex Home Equity Company, LLC.
TRUSTEE
- JPMorgan Chase Bank.
STATISTICAL CALCULATION DATE
- The opening of business on March 1, 2002.
- All statistical information relating to the home equity loans presented
in this prospectus supplement is given as of the statistical calculation
date.
CUT-OFF DATE
- The opening of business on March 1, 2002 or, with respect to any home
equity loans originated after that date but prior to the closing date,
the date of origination of that home equity loan.
- The cut-off date is the date on and after which the issuer will be
entitled to receive all collections on and proceeds of the home equity
loans.
CLOSING DATE
March 22, 2002.
DISTRIBUTION DATE
The 25(th) day of each month, or if the 25(th) day is not a business day,
then the next succeeding business day. The first distribution date will be April
25, 2002.
S-1
RECORD DATE
- With respect to any distribution date and each class of fixed rate
certificates, the last business day of the month immediately preceding
the calendar month in which the distribution date occurs.
- With respect to any distribution date and the variable rate certificates,
the last business day immediately preceding the distribution date or, if
definitive certificates are issued, the last business day of the month
immediately preceding the calendar month in which the distribution date
occurs.
THE CERTIFICATES
On the closing date, the trust will issue the offered certificates, the
Class X-IO certificates and the Class R certificates.
OFFERED CERTIFICATES
The Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class AF-5, Class AF-6,
Class MF-1, Class MF-2, Class BF, Class AV, Class MV-1, Class MV-2, Class BV and
Class A-IO certificates.
SENIOR CERTIFICATES
The Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class AF-5, Class AF-6,
Class AV and Class A-IO certificates.
CLASS A-IO CERTIFICATES
The Class A-IO certificates are comprised of the Group I A-IO component and
the Group II A-IO component. The notional amount of each Group A-IO component of
the Class A-IO certificates on any distribution date will equal the lesser of:
- the aggregate principal balance of the home equity loans in the related
group and
- the scheduled notional amount as described under "DESCRIPTION OF THE
CERTIFICATES" in this prospectus supplement.
The Group I A-IO component and the Group II A-IO component may not be
traded separately.
SUBORDINATE CERTIFICATES
The Class MF-1, Class MF-2, Class BF, Class MV-1, Class MV-2 and Class BV
certificates.
Reference in this prospectus supplement to the Class M-1, Class M-2 and
Class B certificates refer to the Class MF-1 and Class MV-1, Class MF-2 and
Class MV-2, and Class BF and Class BV certificates, as applicable.
NON-OFFERED CERTIFICATES
The Class X-IO certificates and Class R certificates are not being offered
to the public. We have included information with respect to the Class X-IO and
Class R certificates in this prospectus supplement solely to provide you a
better understanding of the offered certificates.
GROUP I CERTIFICATES
The Group I certificates consist of the Group I senior certificates and the
Group I subordinate certificates.
The Group I senior certificates will be the Class AF-1, Class AF-2, Class
AF-3, Class AF-4, Class AF-5 and Class AF-6 certificates and the Group I A-IO
component. The Group I subordinate certificates will be the Class MF-1, Class
MF-2 and Class BF certificates.
GROUP II CERTIFICATES
The Group II certificates consist of the Group II senior certificates and
the Group II subordinate certificates.
The Group II senior certificates will be the Class AV certificates and the
Group II A-IO component. The Group II subordinate certificates will be the Class
MV-1, Class MV-2 and Class BV certificates.
FIXED RATE CERTIFICATES
The Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class AF-5, Class AF-6,
Class MF-1,
S-2
Class MF-2, Class BF and Class A-IO certificates.
VARIABLE RATE CERTIFICATES
The Class AV, Class MV-1, Class MV-2 and Class BV certificates.
DENOMINATIONS
The offered certificates will be offered for purchase in denominations of
$25,000 and multiples of $1,000 above $25,000.
BOOK-ENTRY REGISTRATION
We will issue the offered certificates in book-entry form. You will hold
your interests either through a depository in the United States or through one
of two depositories in Europe. While the offered certificates are in book-entry
form they will be registered in the name of the nominee of the depository in the
United States.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date for each class of offered
certificates is as set forth on the cover page of this prospectus supplement.
DISTRIBUTIONS TO OFFERED CERTIFICATEHOLDERS
INTEREST
You will be entitled to receive payments of interest on each distribution
date to the extent set forth in this prospectus supplement.
Interest on the Class A-IO certificates is payable on the first 20
distribution dates, to the extent set forth in this prospectus supplement. The
Class A-IO certificates will not be entitled to any distributions after the 20th
distribution date (except for any class interest carryover shortfalls).
FIXED RATE CERTIFICATE INTEREST
The interest rate on any distribution date for a fixed rate certificate
will be the applicable interest rate set forth on the cover page of this
prospectus supplement.
The interest period with respect to each distribution date and a fixed rate
certificate is the calendar month preceding the month of the distribution date.
For example, if the distribution date occurs on May 25, 2002, the interest
period would be the month of April 2002. Each calendar month will be deemed to
have 30 days and each year will be deemed to have 360 days. Therefore, if you
are a holder of a fixed rate certificate, you would use the following formula to
calculate your interest payment on any distribution date:
<Table>
30
- --- X IR X PB = your interest payment
360
</Table>
IR = the applicable per annum fixed interest rate, subject to, (1) in the case
of all the fixed rate certificates, other than the Class A-IO certificates,
the Group I net wac cap and (2) in the case of the Class AF-4 and Class
AF-5 certificates, an increase of 0.50% per annum after an affiliate of the
servicer first fails to exercise its clean-up call option.
PB = the principal balance (or aggregate notional amount of the Group I A-IO and
Group II A-IO components, in the case of the Class A-IO certificates) of
your fixed rate certificate immediately prior to any distributions on the
distribution date.
If you are a holder of a fixed rate certificate, we will increase the
interest payment we owe to you for a distribution date by any unpaid interest we
owe to you from prior distribution dates, plus accrued interest at the
applicable certificate rate.
The Group I net wac cap for the fixed rate certificates, other than the
Class A-IO certificates, and other than with respect to the first distribution
date, is the weighted average of the net coupon rates of the Group I home equity
loans related to the applicable distribution date, adjusted for the interest
payable with respect to the Group I A-IO component. The Group I net wac cap is
not applicable on the first distribution date.
If you are a holder of a fixed rate certificate, other than the Class A-IO
certificates, the amount by which we reduce the interest payment we owe to you
because of the effect of the Group I net wac cap, including any interest accrued
on such amount at the related certificate rate, will be paid
S-3
to you on future distribution dates. Payment of these amounts will be made on a
subordinated basis, to the extent that money is available to make these
payments. However, if the clean-up call option is exercised or the home equity
loans are sold in the auction, each as described in this prospectus supplement,
you will generally not be entitled to receive these amounts upon termination of
the trust, except if and to the extent that amounts would otherwise be available
to make distributions in respect of the non-offered certificates.
VARIABLE RATE CERTIFICATE INTEREST
The interest rate on any distribution date with respect to the variable
rate certificates will be the applicable interest rate set forth on the cover
page of this prospectus supplement.
The interest period with respect to each distribution date and the variable
rate certificates is the period from and including the previous distribution
date (or the closing date in the case of the first distribution date) to and
including the day preceding the related distribution date. Interest on the
variable rate certificates will accrue during the related interest period on the
basis of the actual number of days elapsed in the related interest period and a
year consisting of 360 days. Therefore, if you are a holder of a variable rate
certificate, you would use the following formula to calculate your interest
payment on any distribution date:
<Table>
N
- --- X IR X PB = your interest payment
360
</Table>
N = number of days in the interest period.
IR = the per annum floating interest rate for the interest period, subject to
the Group II net wac cap.
PB = the principal balance of your variable rate certificate immediately prior
to any distributions on the distribution date.
If you are a holder of a variable rate certificate, we will increase the
interest payment we owe to you for a distribution date by any unpaid interest we
owe to you from prior distribution dates, plus accrued interest at the
applicable certificate rate.
The Group II net wac cap for the variable rate certificates for the first
distribution date is an amount equal to all interest received on the Group II
home equity loans for the related remittance period less the trustee fee,
servicing fee and interest payable with respect to the Group II A-IO component,
and for any of the remaining distribution dates, is equal to the product of the
weighted average of the net coupon rates of the Group II home equity loans
related to the applicable distribution date, adjusted for the interest payable
with respect to the Group II A-IO component, and a fraction, the numerator of
which is 30 and the denominator of which is the number of days in the related
interest period.
If you are a holder of a variable rate certificate, the amount by which we
reduce the interest payment we owe to you because of the effect of the Group II
net wac cap, including any interest accrued on such amount at the related
certificate rate, will be paid to you on future distribution dates. Payment of
these amounts will be made on a subordinated basis, to the extent that money is
available to make these payments. However, if the clean-up call option is
exercised or the home equity loans are sold in the auction, each as described in
this prospectus supplement, you will generally not be entitled to receive these
amounts upon termination of the trust, except if and to the extent that amounts
would otherwise be available to make distributions in respect of the non-offered
certificates.
PRINCIPAL
On each distribution date, the amount available for distributions of
principal to the offered certificates, other than the related Group A-IO
component, of a group will include (1) principal collections on the related home
equity loans, plus (2) any excess interest collections on the related home
equity loans, and any excess interest collections available on a subordinate
basis from the home equity loans of the other group after required distributions
are made with respect to the other group, required to be distributed to satisfy
the required level of
S-4
overcollateralization for the related group, less (3) any decrease in the
related required level of overcollateralization.
The Class A-IO certificates do not have a certificate principal balance and
will not be entitled to distributions of principal.
GROUP I SENIOR CERTIFICATES
On each distribution date we will distribute principal in a specified
amount to the Group I senior certificates, other than the Group I A-IO
component, as described under "DESCRIPTION OF THE CERTIFICATES--Distributions--
Distributions of Principal" in the following order of priority:
- first, to the Class AF-6 certificates, for each distribution date on or
after the distribution date in April 2005 in an amount up to a specified
amount; and
- second, to the Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class AF-5
and Class AF-6 certificates, in that order, so that each class does not
receive any principal payments until the principal balance of the prior
class has been reduced to zero.
The Class AF-6 certificate is a "lock-out" certificate. If you are a holder
of a Class AF-6 certificate generally you will not be entitled to receive
payments of principal until the distribution date in April 2005. From that point
on, you will be entitled to receive an increasing percentage of your class's
proportionate share of principal payable to the Group I senior certificates,
based on a schedule.
GROUP II SENIOR CERTIFICATES
On each distribution date we will distribute principal in a specified
amount to the Group II senior certificates, other than the Group II A-IO
component, as described under "DESCRIPTION OF THE CERTIFICATES--Distributions--
Distributions of Principal" as follows:
- to the Class AV certificates, until the principal balance of the Class AV
certificates has been reduced to zero.
SUBORDINATE CERTIFICATES
On each distribution date we will distribute principal in respect of the
home equity loans in a group to the subordinate certificates of the related
group on a subordinate basis. Initially, principal in respect of the home equity
loans in a group will generally be distributed exclusively to the senior
certificates of the related group, other than the related Group A-IO component,
until their principal balances have been reduced to specified levels. At that
time, principal distributions in respect of a group not required to maintain the
principal balances of the senior certificates of the related group, other than
the related Group A-IO component, at the required levels will be distributed to
the related subordinate classes (provided a related trigger event has not
occurred) in the amounts and the order of priority described under "DESCRIPTION
OF THE CERTIFICATES--Distributions" in this prospectus supplement.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
- a pool of closed-end fixed rate home equity loans secured by first and
second lien deeds of trust, security deeds or mortgages on primarily one-
to four-family residential properties transferred to the trust on the
closing date;
- a pool of closed-end adjustable rate home equity loans secured by first
lien deeds of trust, security deeds or mortgages on primarily one- to
four-family residential properties transferred to the trust on the
closing date;
- payments on the home equity loans received on and after the cut-off date;
- property that secured a home equity loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
- amounts on deposit in the accounts specified in this prospectus
supplement;
S-5
- rights under any hazard insurance policies, if any, covering the
mortgaged properties; and
- proceeds of the foregoing.
THE HOME EQUITY LOANS
We will divide the home equity loans into two groups. The Group I home
equity loan group will contain home equity loans that bear interest at fixed
rates. The Group II home equity loan group will contain home equity loans that
bear interest at rates that adjust semi-annually based on six-month LIBOR and
the applicable gross margin (subject to the limitations described in this
prospectus supplement and the accompanying prospectus). The initial rate
adjustment date for those home equity loans that bear interest at an adjustable
rate is either six months, two years or three years after the date of
origination of the related home equity loan.
All of the home equity loans in the trust have been originated by CHEC, an
affiliate of CHEC or a broker for simultaneous assignment to CHEC or were
acquired by CHEC from correspondent lenders and reunderwritten to comply with
CHEC's underwriting standards.
The home equity loans are not and will not be guaranteed by the depositor,
the sellers, the servicer, the trustee or any of their affiliates. None of the
home equity loans is insured by a primary mortgage insurance policy.
The statistical information presented in this prospectus supplement is with
respect to 5,011 home equity loans, of which 2,812 are fixed rate home equity
loans and 2,199 are adjustable rate home equity loans, in each case as of the
statistical calculation date. Prior to the closing date, additional home equity
loans may be added to each home equity loan group and some home equity loans may
be removed from each home equity loan group.
As a result, the characteristics of the home equity loans in each home
equity loan group as of the closing date may differ from the characteristics
presented in this prospectus supplement as of the statistical calculation date.
The depositor does not expect a material change in the weighted average
characteristics of either home equity loan group.
DELINQUENCY ADVANCES AND COMPENSATING INTEREST
Each month the servicer will determine the amount of any unpaid interest
due on the home equity loans. If the servicer believes that unpaid interest can
be recovered, then the servicer will either:
- advance the unpaid interest to the trust out of its own funds; or
- advance the unpaid interest to the trust out of collections on the home
equity loans that are not required to be distributed on the related
distribution date.
The servicer will reimburse the trust for amounts advanced from trust
collections prior to the date on which these amounts are required to be a part
of any amounts distributable to you.
The servicer will provide to the trust the amount of any shortfall of
interest on a home equity loan that is caused by a full prepayment of a home
equity loan up to the amount of the aggregate servicing fee payable with respect
to the related home equity loan group for the related period.
The servicer is entitled to be reimbursed by the trust for any delinquency
advances from the related home equity loan and, if the delinquency advance is a
non-recoverable advance, from collections on the home equity loans of the
related group prior to any distributions to you. The servicer is also entitled
to be reimbursed by the trust for any delinquency advances, as well as
unreimbursed payments of compensating interest, from all the home equity loans
of both groups to the extent funds are available after making other required
distributions on the related distribution date.
SERVICING ADVANCES
Unless the servicer determines that any proposed advance is not recoverable
from the related home equity loan, the servicer will pay all "out of pocket"
costs and expenses incurred in the
S-6
performance of its servicing obligations, including, but not limited to:
- expenditures in connection with a foreclosed home equity loan prior to
the liquidation of that home equity loan;
- the cost of any enforcement or judicial proceedings, including
foreclosures; and
- the cost of the management and liquidation of property acquired in
satisfaction of the related home equity loan.
The servicer is entitled to be reimbursed by the trust for any servicing
advances from the liquidation proceeds realized upon the liquidation of the
related home equity loan prior to any distributions to you. The servicer is also
entitled to be reimbursed by the trust for any servicing advances from all the
home equity loans of both groups to the extent funds are available after making
other required distributions on the related distribution date.
CREDIT ENHANCEMENT
SUBORDINATION
The issuance of senior certificates and subordinate certificates by the
trust is designed to increase the likelihood that senior certificateholders,
other than the Class A-IO certificateholders, will receive regular payments of
interest and principal and that Class A-IO certificateholders will receive
regular payments of interest.
The certificates that are designated as senior certificates of a group will
have a payment priority over the certificates that are designated as subordinate
certificates of the related group. Among the classes of subordinate
certificates:
- the Class M-1 certificates of a group will have payment priority over the
Class M-2 certificates of the related group and Class B certificates of
the related group, and
- the Class M-2 certificates of a group will have payment priority over the
Class B certificates of the related group.
ALLOCATION OF LOSSES
If, on any distribution date, there is insufficient excess interest or
overcollateralization in a related group or, to the limited extent described in
this prospectus supplement, excess interest available from the other group, to
absorb realized losses on the related home equity loans, then realized losses on
such home equity loans will be allocated to the subordinate certificates of that
group as follows: first, to the Class B certificates of the related group,
second, to the Class M-2 certificates of the related group and third, to the
Class M-1 certificates of the related group, through a reduction in the
principal balance of the applicable class equal to the realized losses in excess
of such amount of excess interest and overcollateralization on such distribution
date. The pooling and servicing agreement does not permit the allocation of
realized losses on the home equity loans to the senior certificates; however,
investors in the senior certificates should realize that under certain loss
scenarios there will not be sufficient interest and principal collections on the
home equity loans in a group to pay the related senior certificates, other than
the Class A-IO certificates, all the interest and principal amounts to which
such certificates are then entitled or sufficient interest collections on the
home equity loans in a group to pay the related Group A-IO component all the
interest amount to which such Group A-IO component is then entitled.
Once realized losses are allocated to the subordinate certificates, the
principal balance reduced as a result of such realized losses will not be
reinstated thereafter. However, the amount of any realized losses allocated to
the subordinate certificates may be paid to the holders of these certificates
according to the priorities set forth under "DESCRIPTION OF THE
CERTIFICATES--Distributions" in this prospectus supplement.
OVERCOLLATERALIZATION
Overcollateralization is calculated as the amount by which the aggregate
principal balance of the home equity loans in a home equity loan group exceeds
the aggregate principal balance of
S-7
the offered certificates of the related group. The offered certificates will not
have the benefit of any overcollateralization on the closing date. Following the
fifth remittance period, excess interest from a group and, to a limited extent,
from the other group, if any, will be applied as accelerated payments of
principal to the class or classes of related offered certificates, other than
the Class A-IO certificates, then entitled to receive distributions of principal
until the applicable overcollateralization level equals the related required
overcollateralization level.
If there is not sufficient excess interest, the applicable required
overcollateralization level will not be reached or maintained. In addition,
realized losses on the home equity loans of a group will reduce the amount of
overcollateralization for that group. If realized losses on the home equity
loans of a group result in the related overcollateralization amount becoming
negative, the principal balance of the class of related subordinate certificates
then outstanding with the lowest relative payment priority will be reduced by
such negative amount.
CROSSCOLLATERALIZATION
Each home equity loan group provides for limited crosscollateralization of
the offered certificates from the other home equity loan group on a subordinated
basis solely to cause the offered certificates of the other group to reach the
targeted level of overcollateralization for such group and to cover realized
losses allocated to the subordinate certificates of the other group as more
fully described under "DESCRIPTION OF THE CERTIFICATES--Credit Enhancement" in
this prospectus supplement.
OPTIONAL TERMINATION OF THE TRUST BY AN AFFILIATE OF THE SERVICER; AUCTION SALE;
ADDITIONAL PRINCIPAL DISTRIBUTIONS
An affiliate of the servicer may, at its option, terminate the trust by
purchasing all of the home equity loans on any distribution date on or after the
date on which the aggregate outstanding principal balance of the home equity
loans in both groups is less than or equal to 20% of the aggregate outstanding
principal balance of the home equity loans in both groups on the cut-off date.
If the affiliate of the servicer does not exercise this clean-up call
option when it first could have been exercised, then on the next distribution
date after such date, the trustee will begin an auction process to sell the home
equity loans of both groups and the other trust assets. It is a condition to the
sale of the trust assets that the proceeds of the auction are at least
sufficient to pay the aggregate unpaid principal balance of the offered
certificates (other than any class principal carryover shortfalls, as described
in this prospectus supplement), all accrued and unpaid interest thereon (other
than any interest accrued in excess of the applicable interest rate cap), any
unreimbursed servicing advances, delinquency advances and compensating interest,
and any delinquency advances the servicer has failed to remit. If the first
auction of the trust property is not successful because the highest bid received
does not satisfy the minimum purchase price condition, then the trustee will
conduct an auction of the home equity loans every third month thereafter, unless
and until a bid satisfying the minimum purchase price condition is received for
the trust property. Certain affiliates of the servicer may bid in the auction.
If the clean-up call option is not exercised on the date upon which it
first could have been exercised, then on the third distribution date following
such date and on each distribution date thereafter, the amounts that otherwise
would have been payable to the non-offered certificates from collections on a
home equity loan group will be paid to the offered certificates, other than the
related Group A-IO component, of such group as an additional principal
distribution amount. The additional principal distribution amount will be
applied in the same order of priority as the principal distributions for such
distribution date.
OPTIONAL PURCHASE OF DELINQUENT HOME EQUITY LOANS
The servicer has the option, but is not obligated, to purchase from the
trust any home equity loan that becomes delinquent for two consecutive monthly
installments, subject to the
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limitations described in the pooling and servicing agreement.
CERTAIN FEDERAL TAX CONSIDERATIONS
Subject to the considerations discussed under "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" in this prospectus supplement, and in the opinion of Stroock &
Stroock & Lavan LLP, counsel to the sellers and the trust, for federal income
tax purposes, the trust will include three real estate mortgage investment
conduits or "REMICs" and the offered certificates will constitute "regular
interests" in a REMIC and will be treated as debt instruments of the REMIC for
federal income tax purposes with payment terms equivalent to the terms of the
certificates.
ERISA CONSIDERATIONS
Subject to the considerations and conditions described under "ERISA
CONSIDERATIONS" in this prospectus supplement, we expect that the offered
certificates may be purchased by a pension or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended.
LEGAL INVESTMENT CONSIDERATIONS
The Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class AF-5, Class AF-6,
Class MF-1, Class MF-2, Class BF, Class MV-2, Class BV and Class A-IO
certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984. Accordingly, many
institutions with legal authority to invest in comparably rated securities may
not be legally authorized to invest in such certificates. The Class AV and Class
MV-1 certificates will constitute "mortgage related securities." You should
consult your own counsel as to whether and to what extent the offered
certificates constitute legal investments for you.
CERTIFICATE RATINGS
It is a condition to the issuance of the offered certificates that they
receive the respective ratings set forth below from Moody's Investors Service,
Inc., Standard & Poor's Ratings Service, a division of the McGraw-Hill
Companies, Inc. and Fitch Ratings.
<Table>
<Caption>
CLASS S&P MOODY'S FITCH
- ----- ---- ------- -----
AF-1 AAA Aaa AAA
AF-2 AAA Aaa AAA
AF-3 AAA Aaa AAA
AF-4 AAA Aaa AAA
AF-5 AAA Aaa AAA
AF-6 AAA Aaa AAA
MF-1 AA Aa2 AA
MF-2 A A2 A
BF BBB Baa2 BBB
AV AAA Aaa AAA
MV-1 AA Aa2 AA
MV-2 A A2 A
BV BBB Baa2 BBB
A-IO AAA Aaa AAA
</Table>
S-9
RISK FACTORS
You should consider the following risk factors together with all the
information contained in this prospectus supplement and the related prospectus
in deciding whether to purchase any of the certificates.
YOU MAY HAVE DIFFICULTY SELLING
YOUR CERTIFICATES............... The offered certificates will not be listed
on any securities exchange. As a result, if
you wish to sell your certificates, you will
have to find a purchaser that is willing to
purchase your certificates. The underwriters
intend to make a secondary market for the
offered certificates. The underwriters may do
so by offering to buy the offered
certificates from investors that wish to
sell. However, the underwriters will not be
obligated to make offers to buy the offered
certificates and may stop making offers at
any time. In addition, the prices offered, if
any, may not reflect prices that other
potential purchasers, were they to be given
the opportunity, would be willing to pay.
There have been times in the past where there
have been very few buyers of similar asset
backed securities, and there may be similar
times in the future. As a result, you may not
be able to sell your certificates when you
wish to do so or you may not be able to
obtain the price you wish to receive.
THE BORROWERS HAVE LESS THAN
PERFECT CREDIT.................. CHEC underwriting standards generally are
less stringent than those of Fannie Mae or
Freddie Mac with respect to a borrower's
credit history, collateral and in other
respects. The home equity loans originated or
acquired by CHEC or its affiliates have been
made to borrowers that typically have limited
access to traditional mortgage financing for
a variety of reasons, including impaired past
credit experience, limited credit history,
insufficient home equity value, or high
debt-to-income ratios. As a result of this
approach to underwriting, the home equity
loans may experience higher rates of
delinquencies, defaults and foreclosures than
home equity loans underwritten in accordance
with Fannie Mae or Freddie Mac guidelines.
NEWLY ORIGINATED HOME EQUITY
LOANS MAY DEFAULT............... Approximately 99.79% of the home equity loans
as of the statistical calculation date were
originated within twelve months prior to this
date. The weighted average remaining term to
stated maturity of the Group I and Group II
home equity loans as of the statistical
calculation date is approximately 301 months
and 357 months, respectively. Although little
data is available, defaults on home equity
loans, including home equity loans similar to
the home equity loans expected to be included
in the trust, are generally expected to occur
with greater frequency in the early years of
the terms of home equity loans.
S-10
THE RATE OF RETURN OF PRINCIPAL
IS UNCERTAIN DUE TO
PREPAYMENTS................... OVERVIEW. Generally, if prevailing interest
rates fall significantly below the coupon
rates on the home equity loans, the home
equity loans are likely to be subject to
higher prepayment rates than if prevailing
rates remain at or above the coupon rates on
the home equity loans. Conversely, if
prevailing interest rates rise significantly
above the coupon rates on the home equity
loans, the rate of prepayments is likely to
decrease. The average life of your
certificates and, if purchased at other than
par, the yields realized by you will be
sensitive to levels of payment (including
prepayments) on the home equity loans of the
related group and, in the case of an optional
termination of the trust, of both groups.
In general, if you purchase an offered
certificate at a premium to the outstanding
principal amount of the certificate, the
yield on your certificate may be adversely
affected by a higher than anticipated level
of prepayments on the home equity loans of
the related group and, in the case of an
option termination of the trust, of both
groups. Conversely, if you purchase an
offered certificate at a discount to the
outstanding principal amount of the
certificate, the yield on your certificate
may be adversely affected by a lower than
anticipated level of prepayments on the home
equity loans of the related group and, in the
case of an optional termination of the trust,
of both groups.
MANY OF THE HOME EQUITY LOANS HAVE NO
PREPAYMENT PENALTIES. Approximately 34.94% of
the Group I home equity loans and
approximately 23.77% of the Group II home
equity loans, in each case as of the
statistical calculation date, may be prepaid
in whole or in part at any time without
penalty. Home equity loans may not be viewed
by borrowers as permanent financing.
Accordingly, the home equity loans in the
trust may experience a higher rate of
prepayment than traditional mortgage loans.
The trust's prepayment experience may be
affected by a wide variety of factors,
including general economic conditions,
interest rates, the availability of
alternative financing and homeowner mobility.
DUE-ON-SALE CLAUSES. All of the home equity
loans contain due-on-sale provisions and the
servicer is required by the pooling and
servicing agreement to enforce these
provisions unless the enforcement is not
permitted by applicable law or the servicer,
in a manner consistent with reasonable
commercial practice, permits the purchaser of
the related mortgaged property to assume the
home equity loan. To the extent permitted by
applicable law, any assumption will not
release the original borrower from its
obligation under any home equity loan.
2/28 AND 3/27 ADJUSTABLE RATE
LOANS. Approximately 79.86% and 9.21% of the
Group II home equity loans, as of the
statistical calculation date, have a two year
fixed rate term
S-11
followed by a 28 year adjustable rate term or
a three year fixed rate term followed by a 27
year adjustable rate term, respectively. We
refer to these loans in this prospectus
supplement as the 2/28 and 3/27 adjustable
rate loans, respectively. As with home equity
loans generally, the rate of prepayments on
these 2/28 and 3/27 adjustable rate loans
which are in the initial fixed rate period is
sensitive to prevailing interest rates. The
prepayment behavior of the 2/28 and 3/27
adjustable rate loans may differ from that of
the other Group II home equity loans,
although the other Group II home equity loans
also have adjustable interest rates. As a
2/28 or 3/27 adjustable rate loan approaches
its initial adjustment date, the borrower may
become more likely to refinance the loan to
avoid an increase in the coupon rate, even if
fixed rate loans are only available at rates
that are slightly lower or higher than the
coupon rate before adjustment. The existence
of the applicable periodic rate cap, lifetime
cap and lifetime floor also may affect the
likelihood of prepayments resulting from
refinancings.
OWNERS OF CLASS A-IO
CERTIFICATES MAY NOT RECOVER
THEIR INITIAL INVESTMENTS..... An investment in the Class A-IO certificates
is risky because the return of the investment
depends solely on the payments of interest by
borrowers under the home equity loans. If the
borrowers prepay their home equity loans, no
further interest payments will be made on
these loans. If borrowers prepay their home
equity loans very fast, investors in the
Class A-IO certificates may not recover their
initial investments. Further, if the clean-up
call option is exercised or the trust assets
are sold pursuant to the auction process
prior to the 20th distribution date, then the
Class A-IO certificates will receive no
further distributions and investors in the
Class A-IO certificates may not fully recover
their investments. In addition, the Class
A-IO certificates are not entitled to any
distributions after the 20th distribution
date (except for any class interest carryover
shortfalls).
YOU MAY BE UNABLE TO REINVEST
DISTRIBUTIONS IN COMPARABLE
INVESTMENTS................... Asset backed securities, like the offered
certificates, other than the Class A-IO
certificates, usually produce more returns of
principal to investors when market interest
rates fall below the interest rates on the
mortgage loans and produce less returns of
principal when market interest rates rise
above the interest rates on the mortgage
loans. If borrowers refinance their home
equity loans as a result of lower interest
rates, you will receive an unanticipated
payment of principal. As a result, you are
likely to receive more money to reinvest at a
time when other investments generally are
producing a lower yield than that on the
offered certificates, and are likely to
receive less money to reinvest when other
investments generally are producing a higher
yield than that on the offered certificates.
You will bear the risk that the timing and
amount
S-12
of distributions on your offered certificates
will prevent you from attaining your desired
yield.
EFFECT OF HOME EQUITY LOAN YIELD
ON CERTIFICATE RATE OF VARIABLE
RATE CERTIFICATES; BASIS
RISK.......................... Approximately 10.94% of the Group II home
equity loans, as of the statistical
calculation date, have interest rates which
adjust semi-annually based upon the London
interbank offered rate for six-month United
States dollar deposits. We refer to these
loans in this prospectus supplement as the
six-month adjustable rate loans.
Approximately 79.86% and 9.21% of the Group
II home equity loans, as of the statistical
calculation date, are 2/28 and 3/27
adjustable rate loans, respectively. These
home equity loans provide for a fixed
interest rate for a period of approximately
two years or three years, respectively,
following origination and thereafter provide
for interest rate and payment adjustments in
a manner similar to the six-month adjustable
rate loans.
The interest rate for the variable rate
certificates is determined in accordance with
and adjusts monthly based upon one-month
LIBOR, and is subject to the Group II net wac
cap, which for the first distribution date is
an amount equal to all interest received on
the Group II home equity loans for the
related remittance period less the trustee
fee, servicing fee and interest payable with
respect to the Group II A-IO component, and
for the remaining distribution dates, is
equal to the product of the weighted average
of the net coupon rates of the Group II home
equity loans related to the applicable
distribution date, adjusted for the interest
payable with respect to the Group II A-IO
component, and a fraction, the numerator of
which is 30 and the denominator of which is
the number of days in the related interest
period. One-month LIBOR and six-month LIBOR
may respond to different economic and market
factors, and there is not necessarily a
correlation between them. Thus, it is
possible, for example, that one-month LIBOR
may rise during periods in which six-month
LIBOR is stable or is falling or that, even
if both one-month LIBOR and six-month LIBOR
rise during the same period, one-month LIBOR
may rise more rapidly than six-month LIBOR.
Furthermore, even if one-month LIBOR and
six-month LIBOR were at the same level, the
Group II net wac cap may still limit the
amount of interest that would otherwise be
distributable on the variable rate
certificates. The operation of the Group II
net wac cap may cause the certificate rate of
the variable rate certificates to be reduced
for extended periods in a rising interest
rate environment. Although we intend to pay
you on future distribution dates on a
subordinated basis the amount by which we
reduce your interest payment because of the
Group II net wac cap, together with any
interest thereon, we cannot assure you that
excess funds will be available to make these
payments. Moreover, if the clean-up call
option is exercised or the home
S-13
equity loans are sold in the auction, you
will generally not be entitled to receive
those amounts upon termination of the trust,
except if and to the extent that amounts
would otherwise be available to make
distributions in respect of the non-offered
certificates.
In addition, the Group II home equity loans
are subject to periodic adjustment caps and
maximum rate caps, and the weighted average
margin is subject to change based upon
prepayment experience, which also may result
in the Group II net wac cap limiting
increases in the certificate rate for the
variable rate certificates. Finally, the
Group II home equity loans accrue interest on
the basis of a 360-day year assumed to
consist of twelve 30-day months, while
calculations of interest on the variable rate
certificates will be made on the basis of the
actual number of days elapsed in the related
interest period and a year of 360 days. This
may result in the Group II net wac cap
limiting the certificate rate for the
variable rate certificates to less than
one-month LIBOR plus the applicable margin in
interest periods that have more than 30 days.
If you are a holder of a variable rate
certificate, and the certificate rate is
limited in any period by the Group II net wac
cap, you may suffer a temporary or permanent
decline in the market value of your
certificates.
EFFECT OF PREPAYMENTS OF HOME
EQUITY LOANS ON CERTIFICATE
RATES OF FIXED RATE
CERTIFICATES; INTEREST RATE
RISK.......................... The fixed rate certificates, other than the
Class A-IO certificates, are subject to the
Group I net wac cap after the first
distribution date. The Group I net wac cap
following the first distribution date is the
weighted average net coupon rate of the Group
I home equity loans adjusted for the interest
payable with respect to the Group I A-IO
component. If there is a sufficiently high
prepayment rate with respect to home equity
loans bearing a higher coupon than the
weighted average coupon of the Group I home
equity loans, the interest rate payable on
the fixed rate certificates, other than the
Class A-IO certificates, may become subject
to the Group I net wac cap. Although we
intend to pay you on future distribution
dates on a subordinated basis the amount by
which we reduce your interest payment because
of the Group I net wac cap, together with any
interest thereon, we cannot assure you that
excess funds will be available to make these
payments. Moreover, if the clean-up call
option is exercised or the home equity loans
are sold in the auction, you will generally
not be entitled to receive those amounts upon
termination of the trust, except if and to
the extent that amounts would otherwise be
available to make distributions in respect of
the non-offered certificates.
If you are a Group I certificateholder, other
than the holder of the Group I A-IO
component, and the stated fixed rate payable
on your certificates is reduced as a result
of the
S-14
Group I net wac cap, you may suffer a
temporary or permanent decline in the market
value of your certificates.
THE SUBORDINATE CERTIFICATES OF
A GROUP WILL ABSORB CASH
SHORTFALLS BEFORE THE SENIOR
CERTIFICATES OF THE RELATED
GROUP......................... The subordinate certificates of a group will
not receive any distributions of interest
until the senior certificates of the related
group receive their interest distributions
and will not receive any distributions of
principal until the senior certificates,
other than the related Group A-IO component,
of the related group receive their principal
distributions. If the principal and interest
collections for a group are insufficient to
make all of the required distributions on the
offered certificates of the related group,
one or more classes of subordinate
certificates of the related group will not
receive all of their distributions. In
addition, losses due to defaults by
borrowers, to the extent not covered by the
amount of related overcollateralization and
any excess interest for a group and any
excess interest available on a subordinate
basis from the other group after required
distributions are made with respect to the
other group, will be allocated to the
subordinate certificates of the related group
in the reverse order of payment priority. Any
allocation of a loss to a class of
subordinate certificates will reduce its
principal balance, which will not be
recovered unless reimbursed from future
excess interest on a subordinated basis.
Distributions to the subordinate certificates
of a group are made in the following order:
to the related Class M-1 certificates, then
to the related Class M-2 certificates and
then to the related Class B certificates, and
losses are allocated to the subordinate
certificates in the reverse order, commencing
with the related Class B certificates. The
Class M-1 certificates of a group will
receive distributions before, and are
allocated losses after, the other classes of
related subordinate certificates. Conversely,
the Class B certificates of a group will
receive distributions after, and are
allocated losses before, the other classes of
related subordinate certificates. As a
result, the Class B certificates of a group
will be affected to a larger degree by any
losses on the home equity loans of the
related group.
ADDITIONAL RISKS ASSOCIATED WITH
THE SUBORDINATE CERTIFICATES.... The weighted average lives of, and the yields
to maturity on, the related Class M-1
certificates, the related Class M-2
certificates and the related Class B
certificates of a group will be progressively
more sensitive, in that order, to the rate
and timing of borrower defaults and the
severity of ensuing losses on the home equity
loans of the related group. If the actual
rate and severity of losses on the home
equity loans of a group is higher than those
assumed by an investor in the related
certificates, the actual yield to maturity of
such certificates may be lower than the yield
anticipated by that holder based on that
assumption. The timing of losses on the
S-15
home equity loans of a group will also affect
an investor's actual yield to maturity, even
if the rate of defaults and severity of
losses over the life of such home equity
loans are consistent with an investor's
expectations. In general, the earlier a loss
occurs, the greater the effect on an
investor's yield to maturity.
Realized losses on the home equity loans of a
group, to the extent they exceed the amount
of such group's overcollateralization, any
excess interest for such group and any excess
interest available on a subordinate basis
from the other group after required
distributions are made with respect to the
other group, will reduce the certificate
principal balance of the related Class B, the
related Class M-2 and the related Class M-1
certificates, in that order. As a result of
such reductions, less interest will accrue on
such class of subordinate certificates than
would otherwise be the case. Once a realized
loss is allocated to a subordinate
certificate, no interest will be
distributable with respect to such written
down amount. However, the amount of any
realized losses allocated to the subordinate
certificates may be reimbursed to the holders
of the subordinate certificates according to
the priorities set forth under "DESCRIPTION
OF THE CERTIFICATES--Distributions" in this
prospectus supplement.
THE RETURN ON YOUR CERTIFICATES
COULD BE REDUCED BY SHORTFALLS
DUE TO THE SOLDIERS' AND
SAILORS' CIVIL RELIEF
ACT........................... The Soldiers' and Sailors' Civil Relief Act
of 1940, or Relief Act, provides relief to
borrowers who enter active military service
and to borrowers in reserve status who are
called to active duty after the origination
of their mortgage loan. The response of the
United States to the terrorist attacks on
September 11, 2001 has included rescue
efforts and military operations that will
increase the number of citizens who are in
active military service, including persons in
reserve status who have been called or will
be called to active duty. The Relief Act
provides generally that a borrower who is
covered by the Relief Act may not be charged
interest on a mortgage loan in excess of 6%
per annum during the period of the borrower's
active duty. These shortfalls are not
required to be paid by the borrower at any
future time. The servicer is not required to
advance these shortfalls as delinquent
payments and the shortfalls are not covered
by any form of credit enhancement on the
certificates. Interest shortfalls on the home
equity loans due to the application of the
Relief Act or similar legislation or
regulations reduce the amount of interest
available for distribution on the offered
certificates.
The Relief Act also limits the ability of the
servicer to foreclose on a home equity loan
during the borrower's period of active duty
and, in some cases, during an additional
three
S-16
month period thereafter. As a result, there
may be delays in payment and increased losses
on the home equity loans. Those delays and
increased losses will be borne primarily by
the outstanding class of certificates with
the lowest payment priority.
We do not know how many home equity loans
have been or may be affected by the
application of the Relief Act.
We refer you to "CERTAIN LEGAL ASPECTS OF THE
HOME EQUITY LOANS--Soldiers' and Sailors'
Civil Relief Act of 1940" in the prospectus.
THE YIELD ON THE SUBORDINATE
CERTIFICATES WILL BE
PARTICULARLY SENSITIVE TO
PREPAYMENTS................... The multiple class structure of the offered
certificates causes the yield of the
subordinate certificates of a group to be
particularly sensitive to changes in the
rates of prepayments of home equity loans of
the related group. Because distributions of
principal will be made to the classes of
offered certificates, other than the Class
A-IO certificates, according to the
priorities described in this prospectus
supplement, the yield to maturity on the
subordinate certificates of a group will be
sensitive to the rates of prepayment on the
home equity loans of the related group
experienced both before and after the
commencement of principal distributions on
the related subordinate certificates. In
particular, the subordinate certificates of a
group do not receive (unless the certificate
principal balances of the related senior
certificates have been reduced to zero) any
portion of the amount of principal payable to
the offered certificates of the related group
prior to the distribution date in April 2005.
Thereafter, subject to the delinquency and
realized loss performance of the related home
equity loan pool, the subordinate
certificates of a group (unless the
certificate principal balances of the related
senior certificates have been reduced to
zero) may not receive any portion of the
amount of principal then payable to the
offered certificates, other than the related
Group A-IO component, of the related group.
The weighted average lives of the related
subordinate certificates will therefore be
longer than would otherwise be the case. The
effect on the market value of the subordinate
certificates of changes in market interest
rates or market yields for similar securities
may be greater than for the senior
certificates.
YIELD CONSIDERATIONS RELATING TO
EXCESS CASH..................... If the offered certificates, other than the
related Group A-IO component, of a group are
overcollateralized below the required amount,
excess interest for the related group and, to
a limited extent, for the other group, if
any, will be distributable on the related
offered certificates then entitled to
S-17
receive principal distributions as a payment
of principal. If purchased at a premium or a
discount, the yield to maturity on your
certificate will be affected by the rate at
which such excess interest is distributed as
a payment of principal. If the actual rate of
excess interest distributions is slower than
the rate anticipated by an investor who
purchases a related offered certificate at a
discount, the actual yield to the investor
will be lower than the investor's anticipated
yield. If the actual rate of excess interest
distributions is faster than the rate
anticipated by an investor who purchases an
offered certificate at a premium, the actual
yield to the investor will be lower than the
investor's anticipated yield. The amount of
excess interest available for distribution on
any distribution date will be affected by:
- the actual amount of interest
received, advanced, collected or
recovered in respect of the home
equity loans during the calendar month
prior to the related distribution
date;
- changes in the weighted average of the
coupon rates of the home equity loans
resulting from prepayments and
liquidations of such home equity
loans;
- in the case of Group II, adjustments
in the interest rates on the Group II
home equity loans;
- in the case of Group II, adjustments
in the certificate rate on the
variable rate certificates;
- an increase in the certificate rate of
the Class AF-4 and Class AF-5
certificates if an affiliate of the
servicer first fails to exercise the
clean-up call option; and
- whether an affiliate of the servicer
exercises the clean-up call option on
the first date upon which such
clean-up call option could have been
exercised and whether there is a
successful auction of the home equity
loans.
The amount of excess interest distributed as
principal on the offered certificates, other
than the Class A-IO certificates, will also
be based on the required amount of
overcollateralization and the amount of
realized losses on the home equity loans in
each group during the related remittance
period. We cannot assure you that enough
excess interest will be generated to absorb
losses or to maintain the required level of
overcollateralization for either group.
LIQUIDATION OF HOME EQUITY LOANS
COULD CAUSE PAYMENT DELAYS
AND/OR LOSSES................. OVERVIEW. Even assuming that the mortgaged
properties provide adequate security for the
related home equity loans, substantial delays
in receiving proceeds could be encountered by
the trust in connection with the liquidation
of defaulted home equity loans. As a result,
shortfalls in distributions on offered
certificates of the related group could
occur. Further,
S-18
liquidation expenses (including legal fees,
real estate taxes, and maintenance and
preservation expenses) will reduce the
proceeds payable on liquidation of defaulted
home equity loans and thereby reduce the
security for the home equity loans from such
group. In the event any of the mortgaged
properties fail to provide adequate security
for the related home equity loans, holders of
offered certificates of the related group,
and the related subordinate certificates in
particular, could experience a loss.
We refer you to "RISK FACTORS--The
subordinate certificates of a group will
absorb cash shortfalls before the senior
certificates of the related group" in this
prospectus supplement for more detail.
SECOND LIENS. As of the statistical
calculation date, approximately 91.40% of the
aggregate principal balance of the Group I
home equity loans are secured by first liens
on the related properties, and approximately
8.60% of the aggregate principal balance of
the Group I home equity loans are secured by
second liens on the related properties. With
respect to home equity loans that are junior
in priority to liens having a first priority
with respect to the related mortgaged
property, the servicer has the power, in some
cases, to consent to a new mortgage lien on
the mortgaged property having priority over
the home equity loan in connection with the
refinancing of the first lien. Home equity
loans secured by second mortgages are
entitled to proceeds that remain from the
sale of the related mortgaged property after
any related senior mortgage loan and prior
statutory liens have been satisfied. In the
event that the proceeds are insufficient to
satisfy the loans and prior liens in the
aggregate, the trust and, accordingly, you
(1) bear the risk of delay in distributions
while a deficiency judgment, if any, against
the borrower is sought and (2) may suffer a
loss if the deficiency judgment cannot be
obtained or is not realized upon.
In addition, borrowers often have financing
needs in excess of the amount CHEC may
finance under its first lien home equity loan
underwriting guidelines described under "THE
SELLER AND THE SERVICER" in the accompanying
prospectus. In such circumstances, CHEC may
offer a "piggyback" second lien mortgage in
addition to CHEC's first lien mortgage to
finance such excess amount up to a maximum
combined loan-to-value-ratio of 100%.
Approximately 1.00% of the Group I home
equity loans that are secured by first lien
mortgages and 2.36% of the Group II home
equity loans (all of which are secured by
first lien mortgages) are subject to
piggyback second lien mortgages included in
the trust. The loan-to-value ratios for first
lien home equity loans listed under the
tables entitled "Original Combined
Loan-to-Value Ratios of Group I Home Equity
Loans" and "Original Loan-to-Value Ratios of
Group II
S-19
Home Equity Loans" in this prospectus
supplement (and for purposes of the
calculation of the weighted average loan-to-
value ratios of the Group I and Group II home
equity loans) do not reflect the principal
balances of the related piggyback second lien
mortgages. Borrowers with piggyback second
lien mortgages may have little or no equity
in their homes. These borrowers may have a
higher incidence of default than borrowers of
home equity loans with substantial equity in
their homes. In the event of a default on any
of these home equity loans, holders of the
offered certificates of the related group,
and the related subordinate certificates, in
particular, may suffer a loss.
HOME EQUITY LOANS TRANSFERRED TO
THE TRUST MAY HAVE
CHARACTERISTICS THAT DIFFER
FROM THOSE OF THE HOME EQUITY
LOANS PRESENTED IN THIS
PROSPECTUS SUPPLEMENT, WHICH
MAY REDUCE YOUR YIELD TO
MATURITY...................... Following the transfer of the home equity
loans to the trust on the closing date, the
characteristics of the home equity loans in
either loan group, or in both loan groups,
may differ from the information presented in
this prospectus supplement. The
characteristics that may differ include,
among others, the composition of the home
equity loans and of the borrowers, the credit
quality of the home equity loans, the
distribution by interest rate, the
distribution by principal balance, the
distribution by loan-to-value ratio and the
distribution by remaining term to stated
maturity. You should consider potential
variances when making your investment
decision. In addition, as a result of the
changes in the home equity loans included in
the trust, the principal balance or notional
amount, as applicable, of each class of
certificates is subject to a variance of plus
or minus 5%.
THERE COULD BE DELAYS IN
DISTRIBUTIONS ON YOUR
CERTIFICATES IF THE TRANSFER
OF HOME EQUITY LOANS TO THE
TRUST IS NOT CONSIDERED A SALE
IN THE EVENT OF BANKRUPTCY.... The sale of the home equity loans from the
sellers to the depositor and from the
depositor to the trust will be treated by the
sellers, the depositor and the trust as a
sale of the home equity loans. In the event
of an insolvency of a seller or depositor, it
is possible that a receiver or conservator
for, or a creditor of, the seller or
depositor may argue that the transaction
between the seller, the depositor and the
trust was a pledge of the home equity loans
in connection with a borrowing rather than a
true sale. This attempt, even if
unsuccessful, could result in delays in
distributions on the offered certificates.
PREPAYMENT INTEREST SHORTFALLS
MAY RESULT IN LOSS OF
INTEREST...................... When a full principal prepayment is made on a
home equity loan, the mortgagor is charged
interest only up to the date of
S-20
the prepayment instead of for a full month,
which may result in a prepayment interest
shortfall. The servicer is obligated to pay
those shortfalls in interest collections that
are attributable to prepayment interest
shortfalls, but only to the extent of the
aggregate servicing fee payable with respect
to the related group for the related
remittance period.
GEOGRAPHIC CONCENTRATION MAY
AFFECT PERFORMANCE.............. As of the statistical calculation date,
approximately 23.80%, 7.28%, 6.59% and 5.43%
of the Group I home equity loans are located
in Texas, Pennsylvania, Florida and
Connecticut, respectively, and approximately
15.63%, 7.39%, 5.73%, 5.25%, 5.22% and 5.22%
of the Group II home equity loans are located
in California, Texas, Ohio, Michigan, North
Carolina and Georgia, respectively. To the
extent that those regions have experienced or
may experience in the future weaker economic
conditions or greater rates of decline in
real estate values than the United States
generally, a concentration of the home equity
loans in those regions may be expected to
increase the foregoing risks to you. The
sellers and the depositor can neither
quantify the impact of any recent property
value declines on the home equity loans nor
predict whether, to what extent or for how
long declines may continue.
In addition, properties in California and
Florida may be more susceptible than homes
located in other parts of the country to
certain types of uninsured hazards, such as
earthquakes, as well as floods, wildfires,
mudslides, hurricanes and other natural
disasters.
BALLOON LOANS MAY HAVE HIGHER
RATES OF DEFAULT WHICH MAY CAUSE
LOSSES........................ Based on the principal balances of the home
equity loans on the statistical calculation
date, approximately 7.63% of the Group I home
equity loans and none of the Group II home
equity loans are balloon loans. A balloon
loan has monthly payments that will not fully
pay off the loan balance by the maturity
date. As a result, the borrower usually will
have to refinance the balloon loan in order
to pay the amount due. The borrower may not
be able to refinance the balloon loan for any
number of reasons, including the level of
available mortgage rates, the value of the
property or the borrower's payment or credit
history. The trust will not have any funds to
refinance a balloon loan, and the sellers are
not obligated to do so. If the borrower is
unable to refinance the balloon loan, holders
of the Group I offered certificates, and the
Group I subordinate certificates in
particular, may suffer a loss.
VIOLATIONS OF CONSUMER
PROTECTION LAWS MAY RESULT IN
LOSSES........................ Applicable state laws generally regulate
interest rates and other charges and require
specific disclosures. In addition, other
state laws, public policy and general
principles of equity relating to the
protection of consumers, unfair and deceptive
practices and debt collection practices may
apply to the
S-21
origination, servicing and collection of the
loans. Depending on the provisions of the
applicable law and the specific facts and
circumstances involved, violations of these
laws, policies and principles may limit the
ability of the servicer to collect all or
part of the principal of or interest on the
loans, may entitle the borrower to a refund
of amounts previously paid and, in addition,
could subject the owner of the home equity
loan to damages and administrative
enforcement.
The home equity loans are also subject to
federal laws, including:
(1) the federal Truth in Lending Act and
regulation Z promulgated under the Truth in
Lending Act, which require particular
disclosures to the borrowers regarding the
terms of the loans;
(2) the Equal Credit Opportunity Act and
regulation B promulgated under the Equal
Credit Opportunity Act, which prohibit
discrimination on the basis of age, race,
color, sex, religion, marital status,
national origin, receipt of public assistance
or the exercise of any right under the
Consumer Credit Protection Act, in the
extension of credit;
(3) the Americans with Disabilities Act,
which, among other things, prohibits
discrimination on the basis of disability in
the full and equal enjoyment of the goods,
services, facilities, privileges, advantages
or accommodations of any place of public
accommodation; and
(4) the Fair Credit Reporting Act, which
regulates the use and reporting of
information related to the borrower's credit
experience.
Violations of particular provisions of these
federal laws may limit the ability of the
servicer to collect all or part of the
principal of or interest on the home equity
loans of a group and in addition could
subject the trust fund to damages and
administrative enforcement. In this event,
holders of the offered certificates of the
related group, and the related subordinate
certificates in particular, may suffer a
loss.
Approximately 0.01% of the aggregate
principal balance of the home equity loans on
the statistical calculation date are subject
to the Home Ownership and Equity Protection
Act of 1994, which amended the Truth in
Lending Act as it applies to mortgages
subject to the Home Ownership and Equity
Protection Act. The Home Ownership and Equity
Protection Act requires additional
disclosures, specifies the timing of these
disclosures and limits or prohibits inclusion
of some provisions in mortgages subject to
the Home Ownership and Equity Protection Act.
The Home Ownership and Equity Protection Act
also provides that any purchaser or assignee
of a mortgage covered by the Home Ownership
and Equity
S-22
Protection Act is subject to all of the
claims and defenses which the borrower could
assert against the original lender.
The maximum damages that may be recovered
under the Home Ownership and Equity
Protection Act from an assignee are the
remaining amount of indebtedness plus the
total amount paid by the borrower in
connection with the loans. If the trust fund
includes loans subject to the Home Ownership
and Equity Protection Act, the trust will be
subject to all of the claims and defenses
which the borrower could assert against the
original lender. Any violation of the Home
Ownership and Equity Protection Act which
would result in liability would be a breach
of the relevant seller's representations and
warranties, and CHEC would be obligated to
cure the breach or repurchase or, if
permitted by the pooling and servicing
agreement, substitute for the home equity
loan in question.
Some of the home equity loans included in the
trust were underwritten with, and finance the
cost of, credit insurance. From time to time,
originators of home equity loans that finance
the cost of credit insurance have been named
in legal actions brought by federal and state
regulatory authorities alleging that certain
practices employed relating to the sale of
credit insurance constitute violations of
law. Although CHEC has procedures in place to
ensure compliance with applicable law, if
such an action was brought against CHEC with
respect to home equity loans included in the
trust and was successful, it is possible that
the borrower could be entitled to refunds of
amounts previously paid or that the trust
could be subject to damages and
administrative enforcement.
In addition, numerous other federal and state
statutory provisions, including the federal
bankruptcy laws, the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended and
state debtor relief laws, may also adversely
affect the servicer's ability to collect the
principal of or interest on the home equity
loans of a group and holders of the offered
certificates of the related group, and the
related subordinate certificates in
particular, may suffer a loss if the
applicable laws result in these loans being
uncollectible.
REDUCTION IN CERTIFICATE RATING
COULD HAVE AN ADVERSE EFFECT ON
THE VALUE OF YOUR
CERTIFICATES.................. The rating by the rating agencies of the
offered certificates is not a recommendation
for you to purchase, hold or sell the offered
certificates, inasmuch as the rating does not
comment as to the market price or suitability
for a particular investor. We cannot assure
you that the ratings will remain in place for
any given period of time or that the ratings
will not be lowered or withdrawn by the
rating agencies. In general, the ratings
address credit risk and do not address the
likelihood of prepayments on home equity
loans, the likelihood of the payment of any
interest payable to the offered
S-23
certificateholders, on a subordinated basis,
due to the application of any interest rate
cap described under the section "DESCRIPTION
OF THE CERTIFICATES-- Certificate Rate" or
the possibility that offered
certificateholders might realize a lower than
anticipated yield. The ratings of the offered
certificates also do not address the
possibility of the imposition of United
States withholding tax with respect to
non-U.S. persons.
None of the sellers, the servicer or
depositor is required to maintain the ratings
of the offered certificates. Any downgrade in
the ratings assigned to your certificates
will result in a decline in the market value
of your certificates.
POTENTIAL LIABILITY FOR
ENVIRONMENTAL CONDITIONS........ Real property pledged as security to a lender
may be subject to environmental risks. Under
the laws of some states, contamination of a
property may give rise to a lien on the
property to assure the payment of costs of
clean-up. In several states, this type of
lien has priority over the lien of an
existing mortgage or owner's interest against
real property. In addition, under the laws of
some states and under the federal
Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, a
lender may be liable, as an owner or
operator, for costs of addressing releases or
threatened releases of hazardous substances
that require remedy at a property, if agents
or employees of the lender have become
sufficiently involved in the operations of
the borrower, regardless of whether or not
the environmental damage or threat was caused
by a prior owner. A lender also risks
liability on foreclosure of the mortgaged
property.
S-24
DESCRIPTION OF THE HOME EQUITY LOANS
OVERVIEW
The statistical information presented in this prospectus supplement
concerning the pool of home equity loans (the "Home Equity Loans") is based on
the pool of Home Equity Loans CHEC Funding, LLC (the "Depositor") expects to
transfer to Centex Home Equity Loan Trust 2002-B (the "Trust") on the date of
issuance of the Offered Certificates (the "Closing Date"). The statistical
information concerning the Home Equity Loans is as of the opening of business on
March 1, 2002 (the "Statistical Calculation Date").
This subsection describes characteristics of the Home Equity Loans. Unless
otherwise noted, all statistical percentages in this prospectus supplement are
measured by the aggregate principal balance of the related Home Equity Loans as
of the Statistical Calculation Date (the "Statistical Calculation Date Loan
Balance"). Prior to the Closing Date, additional Home Equity Loans may be added
to each Home Equity Loan Group and other Home Equity Loans may be removed from a
Home Equity Loan Group. As a result, the characteristics of the Home Equity
Loans in each Home Equity Loan Group as of the Closing Date may differ from the
characteristics presented in this prospectus supplement as of the Statistical
Calculation Date. The Depositor does not expect any material change in the
weighted average characteristics of any Home Equity Loan Group.
Each Home Equity Loan in the Trust will be assigned to one of two home
equity loan groups ("Group I" and "Group II," respectively, and each a "Home
Equity Loan Group" or "Group"). Each Home Equity Loan Group will constitute a
separate sub-trust. The Home Equity Loans in Group I (the "Group I Home Equity
Loans") will bear interest at fixed interest rates. The Home Equity Loans in
Group II (the "Group II Home Equity Loans") will bear interest at adjustable
interest rates.
References herein to a "Group," when used with respect to a Home Equity
Loan Group, shall mean the Group I Home Equity Loans or the Group II Home Equity
Loans, as the case may be, or when used with respect to a Certificate Group,
shall mean the Group I Certificates or the Group II Certificates, as the case
may be.
The Home Equity Loans to be transferred by Centex Home Equity Company, LLC
("CHEC") and Harwood Street Funding II, LLC (together, the "Sellers") to the
Depositor and from the Depositor to the Trust on the Closing Date are fixed and
adjustable rate home equity loans evidenced by promissory notes secured by first
and second lien deeds of trust, security deeds or mortgages on properties (the
"Mortgaged Properties"). The Mortgaged Properties securing the Home Equity Loans
consist primarily of one-to four-family residential properties and manufactured
housing treated as real property under applicable state law. The Mortgaged
Properties may be owner-occupied and non-owner occupied investment properties
(which include second and vacation homes). None of the Home Equity Loans is
insured by pool mortgage insurance policies or primary mortgage insurance
policies. All of the Home Equity Loans in the Trust have been or will be
originated by CHEC, by an affiliate of CHEC or by a broker for simultaneous
assignment to CHEC or were or will be acquired by CHEC from correspondent
lenders and reunderwritten to comply with CHEC's underwriting standards. All of
the Home Equity Loans will be serviced by CHEC in its capacity as servicer (the
"Servicer"). As of the Statistical Calculation Date, these Home Equity Loans
will have the following general characteristics:
- 5,011 total Home Equity Loans
- 2,812 fixed rate Home Equity Loans
- 2,199 adjustable rate Home Equity Loans
- all of the Home Equity Loans were originated no earlier than July 24,
1998
- located in 46 states
S-25
- Group I Home Equity Loans:
- $189,508,404.58 aggregate outstanding loan balance
- 44.80% of total loan balance of all Home Equity Loans
- Group II Home Equity Loans:
- $233,501,593.88 aggregate outstanding loan balance
- 55.20% of total loan balance of all Home Equity Loans
Approximately 17.16% of the Group I Home Equity Loans and approximately
21.07% of the Group II Home Equity Loans, in each case as of the Statistical
Calculation Date, do not have a first monthly payment due until April 2002.
The Original Loan-to-Value Ratios and Original Combined Loan-to-Value
Ratios with respect to the Home Equity Loans were calculated based upon the
lesser of the appraised values of the Mortgaged Properties at the time of
origination or the purchase price of the related Mortgaged Property if the Home
Equity Loan was made to finance the acquisition of the Mortgaged Property (the
"Appraised Values"). Where more than one appraisal was performed on the subject
property, the lesser of the two values was used to determine the Original
Loan-to-Value Ratio and the Original Combined Loan-to-Value Ratio.
In a limited number of circumstances, and within CHEC underwriting
guidelines, CHEC may discount the Appraised Values of Mortgaged Properties (when
calculating maximum Original Loan-to-Value Ratios and Original Combined
Loan-to-Value Ratios) where the Mortgaged Properties are unique or have a high
value or where the comparables are not within Fannie Mae guidelines. The purpose
for making these reductions is to value the Mortgaged Properties more
conservatively than would otherwise be the case if the appraisals were accepted
as written.
The "Original Combined Loan-to-Value Ratio" of a Home Equity Loan is the
ratio, expressed as a percentage, equal to the sum of any outstanding senior
lien mortgage balance plus the original balance of the Home Equity Loan divided
by the Appraised Value of the related Mortgaged Property, and the "Original
Loan-to-Value Ratio" of a Home Equity Loan is the ratio, expressed as a
percentage, equal to the original balance of the Home Equity Loan divided by the
Appraised Value of the related Mortgaged Property.
We refer you to "RISK FACTORS--The borrowers have less than perfect credit"
and "--Liquidation of home equity loans could cause payment delays and/or
losses" in this prospectus supplement for more detail.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Home Equity Loans. If the residential real estate market has experienced
or should experience an overall decline in property values, causing the
outstanding balances of the Home Equity Loans, together with the outstanding
balances of any first mortgages, to become equal to or greater than the values
of the related Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
S-26
GROUP I HOME EQUITY LOANS
The following summary information with respect to the Group I Home Equity
Loans is as of the Statistical Calculation Date:
<Table>
<Caption>
SUMMARY STATISTICS RANGE (IF APPROPRIATE)
------------------ ------------------------
Avg. Outstanding Principal Balance.................. $67,392.75 $3,094.42 to $529,526.20
Wtd. Avg. Coupon Rate (approximate)................. 9.392% 5.990% to 21.990%
Wtd. Avg. Original Combined Loan-to-Value Ratio
(approximate)..................................... 74.04% 6.15% to 100.00%
Wtd. Avg. Original Term to Maturity (approximate)... 301 months 60 to 360 months
Wtd. Avg. Remaining Term to Maturity
(approximate)..................................... 301 months 30 to 360 months
Wtd. Avg. Original Credit Score (approximate)(1).... 627 400 to 800
Maximum Seasoning................................... 41 months
Ratio of First to Second Liens...................... 91.40% / 8.60%
Outstanding Principal Balance of Loans Secured by
First Liens
Two-to Four-Family Properties..................... $929,409.65
All Other Properties.............................. $172,273,871.07
Outstanding Principal Balance of Loans Secured by
Second Liens
Two-to Four-Family Properties..................... $74,987.90
All Other Properties.............................. $16,230,135.96
Balloon Loans (as a percent of the aggregate
outstanding loan balance)......................... 7.63%
Latest Maturity Date................................ March 10, 2032
30 to 59 day Delinquencies (as a percent of the
aggregate outstanding loan balance)(2)............ 0.00%
</Table>
- ------------------------------
(1) Excludes Home Equity Loans for which a credit score is not available.
(2) Approximately 83.83% of the outstanding loan balance of the Group I Home
Equity Loans had first monthly payments due on or after January 30, 2002, so
that it was not possible for these loans to be 30 days past due as of the
Statistical Calculation Date.
The tables set forth below contain approximate statistical information as
of the Statistical Calculation Date regarding the Group I Home Equity Loans. The
sum of the percentage columns in the following tables may not equal 100% due to
rounding.
S-27
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP I HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL
NUMBER OF STATISTICAL CALCULATION
HOME EQUITY CALCULATION DATE LOAN
STATE OR TERRITORY LOANS DATE LOAN BALANCE BALANCE
- ------------------ ----------- ----------------- -----------
Arizona.............................................. 36 $ 2,085,120.37 1.10%
Arkansas............................................. 45 2,383,056.57 1.26
California........................................... 85 8,321,091.63 4.39
Colorado............................................. 68 7,035,821.99 3.71
Connecticut.......................................... 49 10,290,758.81 5.43
Delaware............................................. 9 690,168.27 0.36
Florida.............................................. 168 12,488,864.06 6.59
Georgia.............................................. 102 7,805,541.64 4.12
Idaho................................................ 6 303,488.60 0.16
Illinois............................................. 14 1,338,152.30 0.71
Indiana.............................................. 38 2,223,587.69 1.17
Iowa................................................. 10 360,639.15 0.19
Kansas............................................... 54 2,317,105.72 1.22
Kentucky............................................. 45 3,152,719.36 1.66
Louisiana............................................ 120 5,804,673.70 3.06
Maine................................................ 13 716,199.70 0.38
Maryland............................................. 13 870,070.78 0.46
Massachusetts........................................ 18 2,545,494.05 1.34
Michigan............................................. 67 4,116,702.50 2.17
Minnesota............................................ 11 1,041,785.08 0.55
Mississippi.......................................... 79 4,175,065.97 2.20
Missouri............................................. 81 3,445,123.20 1.82
Montana.............................................. 5 261,890.15 0.14
Nebraska............................................. 22 1,098,625.25 0.58
Nevada............................................... 11 818,514.95 0.43
New Hampshire........................................ 11 1,008,144.52 0.53
New Jersey........................................... 50 3,477,701.88 1.84
New Mexico........................................... 20 1,326,262.83 0.70
New York............................................. 54 4,522,957.29 2.39
North Carolina....................................... 80 4,523,764.35 2.39
North Dakota......................................... 1 23,594.84 0.01
Ohio................................................. 86 5,146,511.14 2.72
Oklahoma............................................. 63 2,756,025.26 1.45
Oregon............................................... 20 1,155,391.89 0.61
Pennsylvania......................................... 164 13,792,293.16 7.28
Rhode Island......................................... 9 730,552.07 0.39
South Carolina....................................... 41 2,746,275.87 1.45
Tennessee............................................ 117 7,964,184.76 4.20
Texas................................................ 778 45,102,505.54 23.80
Utah................................................. 7 445,861.90 0.24
Virginia............................................. 48 2,626,513.33 1.39
Washington........................................... 46 3,633,351.07 1.92
West Virginia........................................ 12 782,105.63 0.41
Wisconsin............................................ 32 1,891,447.05 1.00
Wyoming.............................................. 4 162,698.71 0.09
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) Determined by property address designated as such in the related mortgage.
S-28
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS
OF GROUP I HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF ORIGINAL COMBINED LOAN-TO-VALUE RATIOS (%) LOANS BALANCE BALANCE
- --------------------------------------------------- ----------- --------------- -----------
Less than 10.00...................................... 5 $ 94,218.64 0.05%
10.01 - 15.00........................................ 3 85,829.72 0.05
15.01 - 20.00........................................ 17 427,122.30 0.23
20.01 - 25.00........................................ 25 970,970.05 0.51
25.01 - 30.00........................................ 27 869,371.05 0.46
30.01 - 35.00........................................ 36 1,316,453.05 0.69
35.01 - 40.00........................................ 72 3,455,364.71 1.82
40.01 - 45.00........................................ 64 3,029,648.89 1.60
45.01 - 50.00........................................ 93 5,575,765.15 2.94
50.01 - 55.00........................................ 96 4,913,609.69 2.59
55.01 - 60.00........................................ 140 8,059,064.48 4.25
60.01 - 65.00........................................ 169 10,727,088.89 5.66
65.01 - 70.00........................................ 305 19,087,225.06 10.07
70.01 - 75.00........................................ 318 23,196,820.57 12.24
75.01 - 80.00........................................ 621 47,023,447.57 24.81
80.01 - 85.00........................................ 359 28,452,418.37 15.01
85.01 - 90.00........................................ 312 26,381,385.04 13.92
90.01 - 95.00........................................ 51 3,116,725.96 1.64
95.01 - 100.00....................................... 99 2,725,875.39 1.44
TOTAL................................................ 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Original
Combined Loan-to-Value Ratio of the Group I Home Equity Loans is
approximately 74.04%.
S-29
COUPON RATES OF GROUP I HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF COUPON RATES(%) LOANS BALANCE BALANCE
- ------------------------ ----------- --------------- -----------
5.501 - 6.000.......................................... 12 $ 1,385,504.88 0.73%
6.001 - 6.500.......................................... 113 17,549,900.09 9.26
6.501 - 7.000.......................................... 184 24,565,895.86 12.96
7.001 - 7.500.......................................... 112 13,280,420.41 7.01
7.501 - 8.000.......................................... 160 13,346,563.50 7.04
8.001 - 8.500.......................................... 118 9,466,152.49 5.00
8.501 - 9.000.......................................... 200 16,334,648.88 8.62
9.001 - 9.500.......................................... 126 8,218,167.15 4.34
9.501 - 10.000......................................... 253 17,137,703.28 9.04
10.001 - 10.500........................................ 162 9,297,745.71 4.91
10.501 - 11.000........................................ 216 11,560,363.51 6.10
11.001 - 11.500........................................ 143 7,418,625.92 3.91
11.501 - 12.000........................................ 227 10,066,130.58 5.31
12.001 - 12.500........................................ 163 6,304,276.87 3.33
12.501 - 13.000........................................ 215 8,935,828.82 4.72
13.001 - 13.500........................................ 158 5,387,529.00 2.84
13.501 - 14.000........................................ 135 5,221,413.65 2.76
14.001 - 14.500........................................ 89 3,111,828.01 1.64
14.501 - 15.000........................................ 17 824,805.14 0.44
15.001 - 15.500........................................ 2 37,111.03 0.02
15.501 - 16.000........................................ 2 21,331.47 0.01
16.501 - 17.000........................................ 1 6,871.65 0.00
17.501 - 18.000........................................ 2 16,627.74 0.01
18.501 - 19.000........................................ 1 9,864.52 0.01
21.501 - 22.000........................................ 1 3,094.42 0.00
TOTAL:................................................. 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Coupon Rate of
the Group I Home Equity Loans is approximately 9.392%.
S-30
LOAN BALANCES OF GROUP I HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF LOAN BALANCES ($) LOANS BALANCE BALANCE
- -------------------------- ----------- --------------- -----------
0.01 - 5,000.00........................................ 5 $ 18,317.64 0.01%
5,000.01 - 10,000.00................................... 25 207,606.68 0.11
10,000.01 - 15,000.00.................................. 91 1,194,916.37 0.63
15,000.01 - 20,000.00.................................. 155 2,767,150.12 1.46
20,000.01 - 25,000.00.................................. 195 4,545,020.03 2.40
25,000.01 - 30,000.00.................................. 212 5,885,753.05 3.11
30,000.01 - 35,000.00.................................. 205 6,751,049.18 3.56
35,000.01 - 40,000.00.................................. 196 7,402,694.50 3.91
40,000.01 - 45,000.00.................................. 168 7,218,950.46 3.81
45,000.01 - 50,000.00.................................. 156 7,510,674.11 3.96
50,000.01 - 55,000.00.................................. 134 7,072,507.77 3.73
55,000.01 - 60,000.00.................................. 154 8,877,346.80 4.68
60,000.01 - 65,000.00.................................. 120 7,544,340.03 3.98
65,000.01 - 70,000.00.................................. 101 6,856,508.29 3.62
70,000.01 - 75,000.00.................................. 103 7,493,640.56 3.95
75,000.01 - 80,000.00.................................. 80 6,228,269.47 3.29
80,000.01 - 85,000.00.................................. 76 6,300,448.44 3.32
85,000.01 - 90,000.00.................................. 65 5,709,738.59 3.01
90,000.01 - 95,000.00.................................. 50 4,610,819.24 2.43
95,000.01 - 100,000.00................................. 54 5,296,326.70 2.79
100,000.01 - 105,000.00................................ 35 3,585,541.59 1.89
105,000.01 - 110,000.00................................ 52 5,596,725.36 2.95
110,000.01 - 115,000.00................................ 27 3,024,232.83 1.60
115,000.01 - 120,000.00................................ 39 4,584,940.87 2.42
120,000.01 - 125,000.00................................ 25 3,068,090.67 1.62
125,000.01 - 130,000.00................................ 21 2,685,050.06 1.42
130,000.01 - 135,000.00................................ 24 3,185,968.14 1.68
135,000.01 - 140,000.00................................ 13 1,784,400.19 0.94
140,000.01 - 145,000.00................................ 15 2,144,563.64 1.13
145,000.01 - 150,000.00................................ 24 3,552,789.31 1.87
150,000.01 - 200,000.00................................ 90 15,733,650.14 8.30
200,000.01 - 250,000.00................................ 36 8,070,449.17 4.26
250,000.01 - 300,000.00................................ 19 5,145,676.41 2.72
300,000.01 - 350,000.00................................ 17 5,559,121.94 2.93
350,000.01 - 400,000.00................................ 15 5,610,946.74 2.96
400,000.01 - 450,000.00................................ 10 4,241,257.76 2.24
450,000.01 - 500,000.00................................ 4 1,913,395.53 1.01
500,000.01 - 550,000.00................................ 1 529,526.20 0.28
TOTAL:................................................. 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the average outstanding Loan Balance
of the Group I Home Equity Loans is approximately $67,392.75.
S-31
TYPES OF MORTGAGED PROPERTIES OF GROUP I HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
PROPERTY TYPE LOANS BALANCE BALANCE
- ------------- ----------- --------------- -----------
Single Family........................................ 2,574 $170,525,771.47 89.98%
PUD.................................................. 143 13,654,230.27 7.21
Condominium.......................................... 33 1,631,148.31 0.86
Manufactured Housing................................. 29 1,534,300.88 0.81
Townhouse............................................ 19 1,072,864.23 0.57
Two- to Four-Family.................................. 13 1,004,397.55 0.53
Other................................................ 1 85,691.87 0.05
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
ORIGINAL TERMS TO MATURITY OF GROUP I HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
ORIGINAL TERM TO MATURITY (MONTHS) LOANS BALANCE BALANCE
- ---------------------------------- ----------- --------------- -----------
0 - 60............................................... 19 $ 393,826.08 0.21%
61 - 120............................................. 199 5,947,045.98 3.14
121 - 180............................................ 744 39,557,143.95 20.87
181 - 240............................................ 389 19,264,025.99 10.17
241 - 300............................................ 25 1,569,371.43 0.83
301 - 360............................................ 1,436 122,776,991.15 64.79
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Original Term
to Maturity of the Group I Home Equity Loans is approximately 301 months.
S-32
REMAINING TERMS TO MATURITY OF GROUP I HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
REMAINING TERM TO MATURITY (MONTHS) LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- -----------
0 - 60............................................... 19 $ 393,826.08 0.21%
61 - 120............................................. 199 5,947,045.98 3.14
121 - 180............................................ 744 39,557,143.95 20.87
181 - 240............................................ 389 19,264,025.99 10.17
241 - 300............................................ 25 1,569,371.43 0.83
301 - 360............................................ 1,436 122,776,991.15 64.79
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Remaining Term
to Maturity of the Group I Home Equity Loans is approximately 301 months.
SEASONING OF GROUP I HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
SEASONING (MONTHS) LOANS BALANCE BALANCE
- ------------------ ----------- --------------- -----------
0.................................................... 1,527 $ 89,844,123.48 47.41%
1 - 6................................................ 1,272 99,359,025.72 52.43
7 - 12............................................... 3 101,411.35 0.05
13 - 18.............................................. 5 169,370.50 0.09
19 - 24.............................................. 3 24,641.32 0.01
25 - 30.............................................. 1 3,094.42 0.00
31 - 42.............................................. 1 6,737.79 0.00
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Seasoning of
the Group I Home Equity Loans is approximately 1 month.
S-33
OCCUPANCY STATUS OF GROUP I HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
OCCUPANCY STATUS LOANS BALANCE BALANCE
- ---------------- ----------- --------------- -----------
Primary Home......................................... 2,738 $186,506,251.18 98.42%
Investment Property.................................. 64 2,521,282.47 1.33
Second Home.......................................... 10 480,870.93 0.25
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
LIEN POSITIONS OF GROUP I HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
LIEN POSITION LOANS BALANCE BALANCE
- ------------- ----------- --------------- -----------
First lien........................................... 2,298 $173,203,280.72 91.40%
Second lien.......................................... 514 16,305,123.86 8.60
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
DOCUMENTATION TYPES OF GROUP I HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
DOCUMENTATION TYPE(1) LOANS BALANCE BALANCE
- --------------------- ----------- --------------- -----------
Full Documentation................................... 2,505 $165,047,749.28 87.09%
Stated Income........................................ 198 14,318,287.14 7.56
Limited Documentation................................ 109 10,142,368.16 5.35
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Guidelines
Applicable to the Home Equity Loans" in the prospectus for a description of
CHEC's documentation programs.
S-34
CREDIT GRADES OF GROUP I HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
CREDIT GRADE(1) LOANS BALANCE BALANCE
- --------------- ----------- --------------- -----------
A+................................................... 435 $ 46,836,117.52 24.71%
A-1.................................................. 970 75,226,787.93 39.70
A-2.................................................. 591 30,780,262.65 16.24
B.................................................... 365 17,525,956.52 9.25
C-1.................................................. 276 10,883,872.35 5.74
C-2.................................................. 112 5,221,905.86 2.76
D.................................................... 63 3,033,501.75 1.60
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Criteria of the
Seller" in the prospectus for a description of CHEC's credit grades and
underwriting criteria.
ORIGINAL CREDIT SCORE DISTRIBUTION OF GROUP I HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
ORIGINAL CREDIT SCORE RANGE(2) LOANS BALANCE BALANCE
- ------------------------------ ----------- --------------- -----------
Not Available(3)..................................... 22 $ 636,743.22 0.34%
400 - 400............................................ 2 115,000.00 0.06
426 - 450............................................ 7 222,138.30 0.12
451 - 475............................................ 37 1,632,505.46 0.86
476 - 500............................................ 85 3,443,941.14 1.82
501 - 525............................................ 255 12,603,147.16 6.65
526 - 550............................................ 352 17,368,570.73 9.17
551 - 575............................................ 352 19,926,255.99 10.51
576 - 600............................................ 301 17,107,255.66 9.03
601 - 625............................................ 313 19,241,347.30 10.15
626 - 650............................................ 342 25,968,159.29 13.70
651 - 675............................................ 293 23,087,930.38 12.18
676 - 700............................................ 160 15,533,017.16 8.20
701 - 725............................................ 109 10,771,054.38 5.68
726 - 750............................................ 85 8,796,450.00 4.64
751 - 775............................................ 49 5,824,069.66 3.07
776 - 800............................................ 48 7,230,818.75 3.82
TOTAL:............................................... 2,812 $189,508,404.58 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Original Credit
Score of the Group I Home Equity Loans (excluding Home Equity Loans for
which a credit score is not available) is approximately 627.
(2) The statistical credit score based on the borrower's historical credit data
obtained by the originator of the Home Equity Loan through one or more of
the three major credit bureaus in connection with the origination of the
Home Equity Loan.
(3) Home Equity Loans indicated as having a credit score that is "not available"
consist of Home Equity Loans where no credit score can be obtained for the
related borrower.
S-35
SECOND MORTGAGE RATIOS OF GROUP I HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF SECOND MORTGAGE RATIOS (%) LOANS BALANCE BALANCE
- ----------------------------------- ----------- -------------- -----------
0.01 - 10.00.......................................... 75 $ 1,065,373.45 6.53%
10.01 - 15.00......................................... 69 1,533,255.94 9.40
15.01 - 20.00......................................... 128 3,725,009.70 22.85
20.01 - 25.00......................................... 67 2,194,131.90 13.46
25.01 - 30.00......................................... 62 2,412,165.63 14.79
30.01 - 35.00......................................... 41 1,627,008.78 9.98
35.01 - 40.00......................................... 27 1,135,040.86 6.96
40.01 - 45.00......................................... 5 295,762.46 1.81
45.01 - 50.00......................................... 8 611,328.72 3.75
50.01 - 55.00......................................... 13 861,066.43 5.28
55.01 - 60.00......................................... 10 396,354.49 2.43
60.01 - 65.00......................................... 5 186,841.35 1.15
65.01 - 70.00......................................... 2 97,984.15 0.60
75.01 - 80.00......................................... 1 130,000.00 0.80
80.01 - 85.00......................................... 1 33,800.00 0.21
TOTAL:................................................ 514 $16,305,123.86 100.00%
</Table>
- ------------------------------
(1) Applies only to Home Equity Loans in the second lien position. The Second
Mortgage Ratios shown above are equal to, with respect to each Home Equity
Loan in the second lien position, the original principal balance of the Home
Equity Loan at the date of origination divided by the sum of (a) the
original principal balance of the Home Equity Loan at the date of
origination and (b) the remaining principal balance of the senior lien on
the related Mortgaged Property at the date of origination of the Home Equity
Loan.
S-36
GROUP II HOME EQUITY LOANS
The following summary information with respect to the Group II Home Equity
Loans is as of the Statistical Calculation Date:
<Table>
<Caption>
SUMMARY STATISTICS RANGE (IF APPROPRIATE)
------------------ -------------------------
Avg. Outstanding Principal Balance...................... $106,185.35 $13,163.74 to $526,500.00
Wtd. Avg. Coupon Rate (approximate)..................... 9.354% 5.500% to 14.150%
Wtd. Avg. Gross Margin (approximate).................... 8.788% 4.200% to 13.650%
Wtd. Avg. Maximum Rate (approximate)(1)................. 16.332% 8.800% to 21.150%
Wtd. Avg. Minimum Rate (approximate)(1)................. 9.354% 5.500% to 14.150%
Wtd. Avg. Original Loan-to-Value Ratio (approximate).... 80.85% 15.12% to 99.69%
Wtd. Avg. Original Term to Maturity (approximate)....... 358 months 60 to 360 months
Wtd. Avg. Remaining Term to Maturity (approximate)...... 357 months 60 to 360 months
Wtd. Avg. Original Credit Score (approximate)(2)........ 581 400 to 800
Maximum Seasoning....................................... 7 months
Ratio of First to Second Liens.......................... 100%/ 0.00%
Outstanding Principal Balance of Loans
Secured by First Liens
Two-to Four-Family Properties...................... $730,087.01
All Other Properties............................... $232,771,506.87
Balloon Loans (as a percent of the aggregate outstanding
loan balance)......................................... 0.00%
Latest Maturity Date.................................... March 15, 2032
30 to 59 day Delinquencies (as a percent of the
aggregate outstanding loan balance)(3)................ 0.00%
Six-Month Adjustable Rate Loans(4)
Percentage of Aggregate Outstanding Group II Principal
Loan Balance....................................... 10.94%
Wtd. Avg. Remaining Period to Coupon Rate Adjustment
(approximate)...................................... 5 months
Wtd. Avg. Initial Interest Rate Adjustment Cap
(approximate)(5)................................... 1.005%
Wtd. Avg. Semi-annual Interest Rate Adjustment Cap
(approximate)(5)................................... 1.000%
2/28 Adjustable Rate Loans(6)
Percentage of Aggregate Outstanding Group II Principal
Loan Balance....................................... 79.86%
Wtd. Avg. Remaining Period to Coupon Rate Adjustment
(approximate)...................................... 23 months
Wtd. Avg. Initial Interest Rate Adjustment Cap
(approximate)(5)................................... 2.078%
Wtd. Avg. Semi-annual Interest Rate Adjustment Cap
(approximate)(5)................................... 1.000%
3/27 Adjustable Rate Loans(7)
Percentage of Aggregate Outstanding Group II Principal
Loan Balance....................................... 9.21%
Wtd. Avg. Remaining Period to Coupon Rate Adjustment
(approximate)...................................... 35 months
Wtd. Avg. Initial Interest Rate Adjustment Cap
(approximate)(5)................................... 2.971%
Wtd. Avg. Semi-annual Interest Rate Adjustment Cap
(approximate)(5)................................... 1.000%
</Table>
- ------------------------------
(1) The "Maximum Rates" or "Minimum Rates" are the highest and lowest rates,
respectively, at which interest may accrue on the Group II Home Equity
Loans.
(2) Excludes Home Equity Loans for which a credit score is not available.
(3) Approximately 86.30% of the outstanding loan balance of the Group II Home
Equity Loans had first monthly payments due on or after January 30, 2002, so
that it was not possible for these loans to be 30 days past due as of the
Statistical Calculation Date.
S-37
(4) "Six-Month Adjustable Rate Loans" have their first adjustment date six
months following their date of origination, and adjust semiannually
thereafter, based on six-month LIBOR plus a margin, subject to certain
limitations.
(5) Above the then current coupon rate.
(6) "2/28 Adjustable Rate Loans" have their first adjustment date two years
after the date of origination, and adjust semiannually thereafter, based on
six-month LIBOR plus a margin, subject to certain limitations.
(7) "3/27 Adjustable Rate Loans" have their first adjustment date three years
after the date of origination, and adjust semiannually thereafter, based on
six-month LIBOR plus a margin, subject to certain limitations.
The tables set forth below contain approximate statistical information as
of the Statistical Calculation Date regarding the Group II Home Equity Loans.
The sum of the percentage columns in the following tables may not equal 100% due
to rounding.
S-38
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
STATE LOANS BALANCE BALANCE
- ----- ----------- --------------- -----------
Arizona.............................................. 85 $ 8,472,602.19 3.63%
Arkansas............................................. 30 2,690,517.95 1.15
California........................................... 195 36,506,036.94 15.63
Colorado............................................. 78 11,567,244.49 4.95
Connecticut.......................................... 16 2,249,230.11 0.96
Delaware............................................. 1 97,963.50 0.04
Florida.............................................. 113 10,372,565.56 4.44
Georgia.............................................. 109 12,197,248.33 5.22
Idaho................................................ 22 2,157,468.92 0.92
Illinois............................................. 33 3,700,962.69 1.58
Indiana.............................................. 34 2,956,214.31 1.27
Iowa................................................. 39 2,290,402.54 0.98
Kansas............................................... 32 3,005,349.44 1.29
Kentucky............................................. 44 3,860,829.12 1.65
Louisiana............................................ 37 2,717,242.85 1.16
Maine................................................ 10 1,032,960.88 0.44
Maryland............................................. 8 1,075,296.86 0.46
Massachusetts........................................ 12 1,739,113.35 0.74
Michigan............................................. 125 12,262,039.77 5.25
Minnesota............................................ 33 3,215,331.27 1.38
Mississippi.......................................... 16 1,127,892.42 0.48
Missouri............................................. 125 10,203,686.94 4.37
Montana.............................................. 7 597,481.69 0.26
Nebraska............................................. 7 459,062.04 0.20
Nevada............................................... 12 1,552,056.37 0.66
New Hampshire........................................ 4 532,164.80 0.23
New Jersey........................................... 52 7,979,797.92 3.42
New Mexico........................................... 29 2,191,508.93 0.94
New York............................................. 43 4,134,106.63 1.77
North Carolina....................................... 133 12,197,619.35 5.22
North Dakota......................................... 1 92,500.00 0.04
Ohio................................................. 143 13,375,772.22 5.73
Oklahoma............................................. 27 1,684,357.37 0.72
Oregon............................................... 9 969,381.30 0.42
Pennsylvania......................................... 60 3,766,030.42 1.61
Rhode Island......................................... 8 1,138,515.78 0.49
South Carolina....................................... 36 3,128,690.76 1.34
Tennessee............................................ 44 4,324,047.97 1.85
Texas................................................ 164 17,257,824.60 7.39
Utah................................................. 15 1,587,083.78 0.68
Vermont.............................................. 3 165,406.40 0.07
Virginia............................................. 45 4,079,965.86 1.75
Washington........................................... 62 8,263,414.10 3.54
West Virginia........................................ 4 248,454.26 0.11
Wisconsin............................................ 93 8,114,720.95 3.48
Wyoming.............................................. 1 163,429.95 0.07
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) Determined by property address designated as such in the related mortgage.
S-39
ORIGINAL LOAN-TO-VALUE RATIOS
OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS (%) LOANS BALANCE BALANCE
- ------------------------------------------ ----------- --------------- -----------
15.01 - 20.00........................................ 4 $ 169,908.67 0.07%
20.01 - 25.00........................................ 4 233,475.76 0.10
25.01 - 30.00........................................ 10 394,446.69 0.17
30.01 - 35.00........................................ 12 576,462.02 0.25
35.01 - 40.00........................................ 19 1,099,127.01 0.47
40.01 - 45.00........................................ 16 1,292,407.21 0.55
45.01 - 50.00........................................ 21 1,992,109.67 0.85
50.01 - 55.00........................................ 36 2,849,068.94 1.22
55.01 - 60.00........................................ 54 4,074,312.40 1.74
60.01 - 65.00........................................ 77 6,529,578.52 2.80
65.01 - 70.00........................................ 140 12,230,358.58 5.24
70.01 - 75.00........................................ 196 18,629,595.62 7.98
75.01 - 80.00........................................ 496 54,945,869.67 23.53
80.01 - 85.00........................................ 387 40,386,397.87 17.30
85.01 - 90.00........................................ 652 80,202,224.65 34.35
90.01 - 95.00........................................ 61 6,863,866.01 2.94
95.01 - 100.00....................................... 14 1,032,384.59 0.44
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Original
Loan-to-Value Ratio of the Group II Home Equity Loans is approximately
80.85%.
S-40
CURRENT COUPON RATES OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF CURRENT COUPON RATES (%) LOANS BALANCE BALANCE
- --------------------------------- ----------- --------------- -----------
5.001 - 5.500.......................................... 3 $ 313,106.81 0.13%
5.501 - 6.000.......................................... 8 1,253,752.43 0.54
6.001 - 6.500.......................................... 18 2,439,288.76 1.04
6.501 - 7.000.......................................... 82 10,074,645.43 4.31
7.001 - 7.500.......................................... 91 12,559,516.16 5.38
7.501 - 8.000.......................................... 174 23,754,815.23 10.17
8.001 - 8.500.......................................... 175 22,470,201.10 9.62
8.501 - 9.000.......................................... 291 35,241,474.05 15.09
9.001 - 9.500.......................................... 204 23,892,907.00 10.23
9.501 - 10.000......................................... 330 34,728,381.43 14.87
10.001 - 10.500........................................ 185 17,470,349.54 7.48
10.501 - 11.000........................................ 265 21,678,461.36 9.28
11.001 - 11.500........................................ 125 10,045,218.12 4.30
11.501 - 12.000........................................ 118 9,326,053.84 3.99
12.001 - 12.500........................................ 48 3,436,405.31 1.47
12.501 - 13.000........................................ 50 2,815,777.51 1.21
13.001 - 13.500........................................ 22 1,350,776.54 0.58
13.501 - 14.000........................................ 9 608,463.26 0.26
14.000 - 14.500........................................ 1 42,000.00 0.02
TOTAL:................................................. 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average current Coupon
Rate of the Group II Home Equity Loans is approximately 9.354%.
S-41
GROSS MARGINS OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF GROSS MARGINS (%) LOANS BALANCE BALANCE
- -------------------------- ----------- --------------- -----------
4.001 - 4.500.......................................... 1 $ 256,259.85 0.11%
4.501 - 5.000.......................................... 6 1,392,490.34 0.60
5.001 - 5.500.......................................... 8 1,283,086.80 0.55
5.501 - 6.000.......................................... 20 3,154,372.67 1.35
6.001 - 6.500.......................................... 63 8,591,202.63 3.68
6.501 - 7.000.......................................... 118 15,816,990.62 6.77
7.001 - 7.500.......................................... 152 19,921,794.64 8.53
7.501 - 8.000.......................................... 196 24,345,977.24 10.43
8.001 - 8.500.......................................... 268 31,814,494.37 13.62
8.501 - 9.000.......................................... 218 25,764,937.80 11.03
9.001 - 9.500.......................................... 271 29,042,428.90 12.44
9.501 - 10.000......................................... 231 21,633,910.23 9.26
10.001 - 10.500........................................ 230 19,070,614.32 8.17
10.501 - 11.000........................................ 140 11,406,602.08 4.89
11.001 - 11.500........................................ 127 9,733,946.69 4.17
11.501 - 12.000........................................ 61 4,422,678.79 1.89
12.001 - 12.500........................................ 50 3,335,718.45 1.43
12.501 - 13.000........................................ 31 2,073,820.17 0.89
13.001 - 13.500........................................ 6 306,924.39 0.13
13.501 - 14.000........................................ 2 133,342.90 0.06
TOTAL:................................................. 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Gross Margin of
the Group II Home Equity Loans is approximately 8.788%.
S-42
MAXIMUM RATES OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF MAXIMUM RATES (%) LOANS BALANCE BALANCE
- -------------------------- ----------- --------------- -----------
8.501 - 9.000.......................................... 1 $ 97,944.20 0.04%
10.501 - 11.000........................................ 1 84,568.70 0.04
12.001 - 12.500........................................ 3 313,106.81 0.13
12.501 - 13.000........................................ 9 1,310,652.65 0.56
13.001 - 13.500........................................ 22 2,908,116.45 1.25
13.501 - 14.000........................................ 85 10,415,643.37 4.46
14.001 - 14.500........................................ 89 12,582,194.72 5.39
14.501 - 15.000........................................ 176 23,835,843.92 10.21
15.001 - 15.500........................................ 177 22,305,805.29 9.55
15.501 - 16.000........................................ 292 35,736,616.12 15.30
16.001 - 16.500........................................ 199 23,461,149.97 10.05
16.501 - 17.000........................................ 327 34,178,246.64 14.64
17.001 - 17.500........................................ 184 17,152,379.18 7.35
17.501 - 18.000........................................ 262 21,551,576.10 9.23
18.001 - 18.500........................................ 125 10,035,023.30 4.30
18.501 - 19.000........................................ 118 9,326,053.84 3.99
19.001 - 19.500........................................ 49 3,491,342.44 1.50
19.501 - 20.000........................................ 49 2,769,027.51 1.19
20.001 - 20.500........................................ 21 1,295,839.41 0.55
20.501 - 21.000........................................ 9 608,463.26 0.26
21.001 - 21.500........................................ 1 42,000.00 0.02
TOTAL:................................................. 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Maximum Rate of
the Group II Home Equity Loans is approximately 16.332%.
S-43
NEXT INTEREST ADJUSTMENT DATES OF GROUP II HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
NEXT INTEREST ADJUSTMENT DATE LOANS BALANCE BALANCE
- ----------------------------- ----------- --------------- -----------
March 2002............................................. 1 $ 82,338.25 0.04%
April 2002............................................. 1 36,970.88 0.02%
June 2002.............................................. 38 4,802,866.32 2.06%
July 2002.............................................. 72 6,919,839.65 2.96%
August 2002............................................ 83 7,521,377.00 3.22%
September 2002......................................... 68 6,174,029.45 2.64%
July 2003.............................................. 2 108,062.78 0.05%
August 2003............................................ 5 663,591.04 0.28%
September 2003......................................... 5 895,634.34 0.38%
October 2003........................................... 8 1,394,282.05 0.60%
November 2003.......................................... 9 1,191,273.91 0.51%
December 2003.......................................... 185 20,534,626.24 8.79%
January 2004........................................... 540 61,924,274.13 26.52%
February 2004.......................................... 596 60,368,566.09 25.85%
March 2004............................................. 380 39,382,487.28 16.87%
December 2004.......................................... 21 2,289,456.50 0.98%
January 2005........................................... 68 7,972,035.81 3.41%
February 2005.......................................... 76 7,594,309.76 3.25%
March 2005............................................. 41 3,645,572.40 1.56%
TOTAL:................................................. 2,199 $233,501,593.88 100.00%
</Table>
S-44
LOAN BALANCES OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF LOAN BALANCES ($) LOANS BALANCE BALANCE
- -------------------------- ----------- --------------- -----------
10,000.01 - 15,000.00................................ 1 $ 13,163.74 0.01%
15,000.01 - 20,000.00................................ 6 114,049.95 0.05
20,000.01 - 25,000.00................................ 31 722,046.60 0.31
25,000.01 - 30,000.00................................ 42 1,167,413.48 0.50
30,000.01 - 35,000.00................................ 55 1,815,381.13 0.78
35,000.01 - 40,000.00................................ 64 2,423,844.75 1.04
40,000.01 - 45,000.00................................ 79 3,380,914.46 1.45
45,000.01 - 50,000.00................................ 81 3,860,049.61 1.65
50,000.01 - 55,000.00................................ 94 4,930,973.52 2.11
55,000.01 - 60,000.00................................ 103 5,936,939.69 2.54
60,000.01 - 65,000.00................................ 91 5,695,861.31 2.44
65,000.01 - 70,000.00................................ 92 6,234,568.63 2.67
70,000.01 - 75,000.00................................ 98 7,098,973.45 3.04
75,000.01 - 80,000.00................................ 87 6,766,605.31 2.90
80,000.01 - 85,000.00................................ 71 5,875,179.77 2.52
85,000.01 - 90,000.00................................ 94 8,250,167.87 3.53
90,000.01 - 95,000.00................................ 63 5,855,092.52 2.51
95,000.01 - 100,000.00............................... 105 10,255,658.46 4.39
100,000.01 - 105,000.00.............................. 72 7,388,916.17 3.16
105,000.01 - 110,000.00.............................. 69 7,416,866.13 3.18
110,000.01 - 115,000.00.............................. 71 7,977,464.33 3.42
115,000.01 - 120,000.00.............................. 63 7,420,237.29 3.18
120,000.01 - 125,000.00.............................. 49 5,990,777.11 2.57
125,000.01 - 130,000.00.............................. 61 7,778,866.55 3.33
130,000.01 - 135,000.00.............................. 45 5,961,475.15 2.55
135,000.01 - 140,000.00.............................. 45 6,182,301.68 2.65
140,000.01 - 145,000.00.............................. 28 3,986,467.85 1.71
145,000.01 - 150,000.00.............................. 24 3,546,306.62 1.52
150,000.01 - 200,000.00.............................. 218 37,826,447.64 16.20
200,000.01 - 250,000.00.............................. 115 25,856,509.06 11.07
250,000.01 - 300,000.00.............................. 46 12,488,673.26 5.35
300,000.01 - 350,000.00.............................. 19 6,315,311.79 2.70
350,000.01 - 400,000.00.............................. 8 2,950,293.94 1.26
400,000.01 - 450,000.00.............................. 6 2,539,554.27 1.09
450,000.01 - 500,000.00.............................. 2 951,740.79 0.41
500,000.01 - 550,000.00.............................. 1 526,500.00 0.23
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the average outstanding Loan Balance
of the Group II Home Equity Loans is approximately $106,185.35.
S-45
TYPES OF MORTGAGED PROPERTIES OF GROUP II HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
PROPERTY TYPE LOANS BALANCE BALANCE
- ------------- ----------- --------------- -----------
Single Family........................................ 1,992 $205,409,569.47 87.97%
PUD.................................................. 131 21,004,740.28 9.00
Condominium.......................................... 35 3,678,403.79 1.58
Manufactured Housing................................. 17 1,413,542.90 0.61
Townhouse............................................ 16 1,265,250.43 0.54
Two-to Four- Family.................................. 8 730,087.01 0.31
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
ORIGINAL TERMS TO MATURITY OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
ORIGINAL TERM TO MATURITY (MONTHS) LOANS BALANCE BALANCE
- ---------------------------------- ----------- --------------- -----------
0 - 60............................................... 1 $ 21,800.00 0.01%
61 - 120............................................. 11 496,951.87 0.21
121 - 180............................................ 24 1,309,319.66 0.56
181 - 240............................................ 10 823,826.35 0.35
301 - 360............................................ 2,153 230,849,696.00 98.86
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Original Term
to Maturity of the Group II Home Equity Loans is approximately 358 months.
REMAINING TERMS TO MATURITY OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
REMAINING TERM TO MATURITY (MONTHS) LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- -----------
0 - 60............................................... 1 $ 21,800.00 0.01%
61 - 120............................................. 11 496,951.87 0.21
121 - 180............................................ 24 1,309,319.66 0.56
181 - 240............................................ 10 823,826.35 0.35
301 - 360............................................ 2,153 230,849,696.00 98.86
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Remaining Term
to Maturity of the Group II Home Equity Loans is approximately 357 months.
S-46
SEASONING OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
SEASONING (MONTHS) LOANS BALANCE BALANCE
- ------------------ ----------- --------------- -----------
0.................................................... 1,266 $128,139,155.22 54.88%
1 - 6................................................ 932 105,294,571.85 45.09
7 - 12............................................... 1 67,866.81 0.03
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Seasoning of
the Group II Home Equity Loans is approximately 1 month.
OCCUPANCY STATUS OF GROUP II HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
OCCUPANCY STATUS LOANS BALANCE BALANCE
- ---------------- ----------- --------------- -----------
Primary Home......................................... 2,147 $230,451,348.15 98.69%
Investment Property.................................. 47 2,761,027.82 1.18
Second Home.......................................... 5 289,217.91 0.12
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
DOCUMENTATION TYPES OF GROUP II HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
DOCUMENTATION TYPE(1) LOANS BALANCE BALANCE
- --------------------- ----------- --------------- -----------
Full Documentation................................... 1,932 $202,902,359.93 86.90%
Stated Income........................................ 164 18,017,753.43 7.72
Limited Documentation................................ 103 12,581,480.52 5.39
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Guidelines
Applicable to the Home Equity Loans" in the prospectus for a description of
CHEC's documentation programs.
S-47
CREDIT GRADES OF GROUP II HOME EQUITY LOANS
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
CREDIT GRADE(1) LOANS BALANCE BALANCE
- --------------- ----------- --------------- -----------
A+................................................... 75 $ 10,014,300.03 4.29%
A-1.................................................. 647 78,560,165.33 33.64
A-2.................................................. 692 76,131,782.60 32.60
B.................................................... 385 37,009,036.40 15.85
C-1.................................................. 280 21,631,660.85 9.26
C-2.................................................. 120 10,154,648.67 4.35
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Criteria of the
Seller" in the prospectus for a description of CHEC's credit grades and
underwriting criteria.
S-48
ORIGINAL CREDIT SCORE DISTRIBUTION OF GROUP II HOME EQUITY LOANS(1)
<Table>
<Caption>
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
ORIGINAL CREDIT SCORE RANGE(2) LOANS BALANCE BALANCE
- ------------------------------ ----------- --------------- -----------
Not Available(3)..................................... 11 $ 535,955.15 0.23%
400 - 400............................................ 1 47,200.00 0.02
401 - 425............................................ 1 56,980.43 0.02
426 - 450............................................ 3 215,544.44 0.09
451 - 475............................................ 28 1,721,234.75 0.74
476 - 500............................................ 58 4,723,136.29 2.02
501 - 525............................................ 269 26,096,641.31 11.18
526 - 550............................................ 464 47,577,048.38 20.38
551 - 575............................................ 382 41,604,572.99 17.82
576 - 600............................................ 311 34,687,056.58 14.86
601 - 625............................................ 259 29,373,962.55 12.58
626 - 650............................................ 196 20,843,693.29 8.93
651 - 675............................................ 97 10,931,501.17 4.68
676 - 700............................................ 61 8,127,340.33 3.48
701 - 725............................................ 27 3,323,714.09 1.42
726 - 750............................................ 19 2,075,046.75 0.89
751 - 775............................................ 8 1,112,430.47 0.48
776 - 800............................................ 4 448,534.91 0.19
TOTAL:............................................... 2,199 $233,501,593.88 100.00%
</Table>
- ------------------------------
(1) As of the Statistical Calculation Date, the weighted average Original Credit
Score of the Group II Home Equity Loans (excluding Home Equity Loans for
which a credit score is not available) is approximately 581.
(2) The statistical credit score based on the borrower's historical credit data
obtained by the originator of the Home Equity Loan through one or more of
the three major credit bureaus in connection with the origination of the
Home Equity Loan.
(3) Home Equity Loans indicated as having a credit score that is "not available"
consist of Home Equity Loans where no credit score can be obtained for the
related borrower.
DELINQUENCY AND LOSS EXPERIENCE
CHEC commenced its servicing activities of home equity loans similar to the
Home Equity Loans in October 1997. The following tables set forth CHEC's
delinquency and loss experience as of the dates and for the periods indicated
with respect to (1) home equity loans originated or acquired, and serviced, by
CHEC that are warehoused in the Harwood Street Funding II, LLC mortgage loan
warehouse facility and (2) securitized home equity loans originated or acquired,
and serviced, by CHEC. These loans are similar in type to the Home Equity Loans.
No home equity loan is considered delinquent for purposes of the table until a
payment is one calendar month past due on a contractual basis. The delinquency
and loss percentages may be affected by the size and relative lack of seasoning
of this servicing portfolio which increased from approximately $966,480,950 at
March 31, 1999 to approximately $3,874,181,822 at December 31, 2001. CHEC
believes that as the existing loan portfolio becomes more seasoned, the rate of
delinquencies, loan losses, foreclosures and REO properties will increase.
Accordingly, the information in the tables below is for illustrative purposes
only and is not intended to indicate or predict the expected delinquency or loss
experience on past, current or future pools of home equity loans for which CHEC
is the servicer.
S-49
DELINQUENCY EXPERIENCE
<Table>
<Caption>
AS OF DECEMBER 31, 2001 AS OF MARCH 31, 2001 AS OF MARCH 31, 2000 AS OF MARCH 31, 1999
------------------------- ------------------------- ------------------------- -----------------------
BY BY BY BY
NUMBER BY DOLLAR NUMBER BY DOLLAR NUMBER BY DOLLAR NUMBER BY DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- -------------- -------- -------------- -------- -------------- -------- ------------
Portfolio(1).......... 56,419 $3,874,181,822 48,406 $3,194,791,240 29,235 $1,950,284,484 14,304 $966,480,950
Delinquency Percentage
30-59 days.......... 4.15% 3.36% 2.44% 2.23% 1.48% 1.41% 1.60% 1.34%
60-89 days.......... 1.44% 1.22% 0.88% 0.83% 0.55% 0.52% 0.55% 0.52%
90 days and over.... 3.72% 3.52% 2.92% 2.91% 2.31% 2.25% 1.17% 1.08%
------ -------------- ------ -------------- ------ -------------- ------ ------------
Total Delinquency
Percentage(2)(3).... 9.31% 8.10% 6.24% 5.97% 4.34% 4.18% 3.32% 2.94%
====== ============== ====== ============== ====== ============== ====== ============
Percentage of REO
Properties.......... 1.56% 1.56% 1.02% 0.99% 0.63% 0.60% 0.20% 0.21%
</Table>
- ------------------------------
(1) Portfolio includes (i) loans originated or acquired, and serviced, by CHEC
that are warehoused in the Harwood Street Funding II, LLC mortgage loan
warehouse facility and (ii) securitized loans originated or acquired, and
serviced, by CHEC.
(2) Excludes REO properties.
(3) Totals may not sum due to rounding.
LOSS EXPERIENCE
<Table>
<Caption>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
NINE MONTHS ENDED ENDED ENDED ENDED
DECEMBER 31, 2001 MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 1999
----------------- ----------------- ----------------- -----------------
DOLLAR AMOUNT ($) DOLLAR AMOUNT ($) DOLLAR AMOUNT ($) DOLLAR AMOUNT ($)
----------------- ----------------- ----------------- -----------------
Average Portfolio(1)....... 3,635,158,544 2,427,066,408 1,462,106,026 566,006,851
Net Losses(2).............. 20,330,887 18,673,245 6,129,076 135,035
Net Losses as a Percentage
of Average
Portfolio(3)............. 0.75% 0.77% 0.42% 0.02%
</Table>
- ------------------------------
(1) "Average Portfolio" during the period is the arithmetic average of the
principal balances of the loans outstanding on the last day of each month
during the period. Portfolio includes (i) loans originated or acquired, and
serviced, by CHEC that are warehoused in the Harwood Street Funding II, LLC
mortgage loan warehouse facility and (ii) securitized loans originated or
acquired, and serviced, by CHEC.
(2) "Net Losses" means gross losses minus recoveries.
(3) For the nine months ended December 31, 2001, "Net Losses as a Percentage of
Average Portfolio" is annualized by dividing "Net Losses" by 3 and
multiplying the result by 4.
S-50
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on each class of Offered Certificates of a
Group, other than the related Group A-IO component, the aggregate amount of
distributions on each class of Offered Certificates of a Group and the yield to
maturity of each class of Offered Certificates of a Group will be related to the
rate and timing of payments of principal on the Home Equity Loans of the related
Group. The rate of principal payments on the Home Equity Loans will in turn be
affected by the amortization schedules of the Home Equity Loans, by the rate of
principal prepayments on the Home Equity Loans (including for this purpose
prepayments resulting from refinancings of the loans or liquidations of the
loans due to defaults, casualties, condemnations and repurchases by CHEC or
purchases by the Servicer of delinquent home equity loans) and by realized
losses on the Home Equity Loans. Certain of the Home Equity Loans may be prepaid
by the mortgagors at any time without penalty. Certain of the Home Equity Loans
are subject to penalties for prepayments.
PREPAYMENTS
Prepayments, liquidations and purchases of the Home Equity Loans of a Group
(including any optional purchase by the Servicer of a delinquent Home Equity
Loan, the purchase of all the Home Equity Loans by an affiliate of the Servicer
in connection with the termination of the Trust and the sale of the Trust assets
pursuant to the auction) will result in distributions on the related Offered
Certificates, other than the Class A-IO Certificates, of principal amounts which
would otherwise be distributed over the remaining terms of such Home Equity
Loans. Since the rate of payment of principal of the Home Equity Loans will
depend on future events and a variety of factors, no assurance can be given as
to the rate or timing of principal prepayments. The extent to which the yield to
maturity of an Offered Certificate may vary from the anticipated yield will
depend upon the degree to which an Offered Certificate of a Group is purchased
at a discount or premium, and the degree to which the timing of payments on the
Offered Certificate is sensitive to prepayments, liquidations and purchases of
the related Home Equity Loans.
The rate of prepayment on the Home Equity Loans cannot be predicted. As of
the Statistical Calculation Date, approximately 34.94% of the Group I Home
Equity Loans and approximately 23.77% of the Group II Home Equity Loans may be
prepaid in whole or in part at any time without penalty. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the Home
Equity Loans may experience a higher rate of prepayment than traditional
mortgage loans. The prepayment experience of the Trust with respect to the Home
Equity Loans may be affected by a wide variety of factors, including economic
conditions, prevailing interest rate levels, the availability of alternative
financing and homeowner mobility and changes affecting the deductibility for
Federal income tax purposes of interest payments on home equity loans. All of
the Home Equity Loans will contain "due-on-sale" provisions, and the Servicer is
required by the Agreement to enforce the provisions, unless the enforcement is
not permitted by applicable law or the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Home Equity Loan. The enforcement of a "due-on-sale"
provision will have the same effect as a prepayment of the related Home Equity
Loan. The rate of prepayment of the Home Equity Loans may also be affected by
the extent to which the Home Equity Loans provide for the payment of a penalty
in connection with a prepayment and the amount of the penalty.
We refer you to "CERTAIN LEGAL ASPECTS OF THE HOME EQUITY
LOANS--Due-on-Sale Clauses in Home Equity Loans" in the prospectus for more
detail.
As with fixed rate obligations generally, the rate of prepayment on a pool
of home equity loans with fixed rates, including the Group I Home Equity Loans,
is affected by prevailing market rates for home equity loans of a comparable
term and risk level. When the market interest rate is below the mortgage coupon,
mortgagors may have an increased incentive to refinance their home equity loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged
S-51
properties, to meet cash flow needs or to make other investments. The prepayment
behavior of the 2/28 and 3/27 adjustable rate loans may differ from that of the
other Home Equity Loans. As a 2/28 or 3/27 adjustable rate loan approaches its
initial adjustment date, the borrower may become more likely to refinance the
loan to avoid an increase in the coupon rate, even if fixed rate loans are only
available at rates that are slightly lower or higher than the coupon rate before
adjustment. The existence of the applicable periodic rate cap, lifetime cap and
lifetime floor also may affect the likelihood of prepayments resulting from
refinancings. As is the case with conventional fixed rate home equity loans,
adjustable rate home equity loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable rate home equity loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate home equity loans at competitive
rates may encourage mortgagors to refinance their adjustable rate home equity
loans to "lock in" a lower fixed interest rate. However, no assurance can be
given as to the level of prepayments that the Home Equity Loans will experience.
Furthermore, with respect to up to 10% of the aggregate Loan Balance of the Home
Equity Loans as of the Cut-Off Date, the Depositor may deliver all or a portion
of each related mortgage file to the Trustee or the Custodian on behalf of the
Trustee no later than 20 days after the Closing Date. Should the Seller fail to
deliver all or a portion of any mortgage file to the Depositor or other designee
of the Depositor or, at the Depositor's direction, to the Trustee or the
Custodian on behalf of the Trustee, within that period, the Seller will be
required (i) to use its best efforts to deliver a replacement Home Equity Loan
satisfying the criteria specified in the Agreement for the related delayed
delivery Home Equity Loan or (ii) if no such replacement Home Equity Loan has
been delivered within the time period specified in the Agreement, to repurchase
the related delayed delivery Home Equity Loan. Any repurchases pursuant to this
provision would also have the effect of accelerating the rate of prepayments on
the Home Equity Loans.
PROJECTED YIELDS
Excess Interest (as defined in "DESCRIPTION OF THE CERTIFICATES--Glossary"
below) for the Home Equity Loans of a Group will be distributed in reduction of
the Certificate Principal Balance of the Offered Certificates of the related
Group then entitled to distributions of principal on each Distribution Date to
the extent that the then required overcollateralization amount applicable to
such Group exceeds the actual related overcollateralization amount. In addition,
Excess Interest for the Home Equity Loans of the other Group may be available
for distribution in reduction of the Certificate Principal Balance of such
Offered Certificates on a subordinated basis, to the extent described in
"DESCRIPTION OF THE CERTIFICATES--Distributions" below. If purchased at a
premium or a discount, the yield to maturity on an Offered Certificate will be
affected by the rate at which such Excess Interest is distributed in reduction
of the applicable Certificate Principal Balance of the Offered Certificates. If
the actual rate of such Excess Interest distribution is slower than the rate
anticipated by an investor who purchases an Offered Certificate, and
particularly a Subordinate Certificate, at a discount, the actual yield to the
investor will be lower than the investor's anticipated yield. If the actual rate
of such Excess Interest distribution is faster than the rate anticipated by an
investor who purchases an Offered Certificate at a premium, the actual yield to
the investor will be lower than the investor's anticipated yield. The amount of
applicable Excess Interest available for distribution on any Distribution Date
will be affected by the actual amount of interest received, advanced, collected
or recovered in respect of the Home Equity Loans during the related Remittance
Period and the amount will be influenced by changes in the weighted average of
the coupon rates of the Home Equity Loans resulting from prepayments and
liquidations. The amount of Excess Interest distributions applied in reduction
of the Certificate Principal Balance of the Offered Certificates of a Group on
each Distribution Date will be based on the then required overcollateralization
amount for such Group. Once the required level of overcollateralization for such
Group is reached, the application of Excess Interest to accelerate
overcollateralization will cease, unless necessary to maintain the applicable
required overcollateralization amount.
In addition, if the clean-up call option is not exercised on the date upon
which it first could have been exercised, then on the third Distribution Date
following such date, and on each Distribution Date
S-52
thereafter, the amounts that otherwise would have been payable to the
Non-Offered Certificates from collections on a Group will be paid to the Offered
Certificates of such Group, other than the related Group A-IO component, as an
additional principal distribution amount. Such additional principal
distributions may result in an accelerated rate of amortization of the related
Offered Certificates and affect the weighted average life and yield on your
investment. The timing in which the clean-up call may first be exercised and in
which the resulting auction process to sell the Home Equity Loans would occur
will be affected by prepayments in both Groups.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Credit Enhancement--
Overcollateralization Resulting from Cash Flow Structure" in this prospectus
supplement for more detail.
SUBORDINATE CERTIFICATES
The Subordinate Certificates of a Group provide credit enhancement for the
Senior Certificates in the related Group and may absorb losses on the Home
Equity Loans in the related Home Equity Loan Group. The weighted average lives
of, and the yields to maturity on, the Subordinate Certificates of a Group, in
reverse order of their relative payment priorities, will be progressively more
sensitive to the rate and timing of borrower defaults and the severity of
ensuing losses on the related Home Equity Loans. If the actual rate and severity
of losses on the Home Equity Loans of a Home Equity Loan Group are higher than
those assumed by a holder of a Subordinate Certificate of the related Group, the
actual yield to maturity on the holder's certificate may be lower than the yield
expected by the holder based on that assumption. Realized Losses on the Home
Equity Loans of a Home Equity Loan Group will reduce the Certificate Principal
Balance of the class of Subordinate Certificates of the related Group then
outstanding with lowest relative payment priority if and to the extent that the
aggregate of the Certificate Principal Balances of all classes of Certificates
of the related Group, following all distributions on a Distribution Date,
exceeds the aggregate principal balance of the related Home Equity Loans. As a
result of these reductions, less interest will accrue on that class of
Subordinate Certificates than otherwise would be the case. Under the limited
circumstances set forth under "DESCRIPTION OF THE CERTIFICATES--Distributions",
Excess Interest from one Group is payable in respect of Realized Losses
allocated to the Subordinate Certificates of the other Group.
In addition, the Subordinate Certificates of a Group will not be entitled
to any principal distributions prior to the Stepdown Date applicable to such
Group or during the continuation of a Trigger Event applicable to such Group,
unless all of the Certificates of such Group with a higher relative payment
priority (other than the related Group A-IO component) have been paid in full.
Because of the disproportionate distribution of principal on the Senior
Certificates of a Group, depending on the timing of Realized Losses, defaults
and delinquencies on the Home Equity Loans of a Home Equity Loan Group and the
availability, if any, of Excess Interest amounts from the other Group, the
weighted average lives of the Subordinate Certificates of such Group may be
longer than would otherwise be the case.
PAYMENT DELAY FEATURE OF THE FIXED RATE CERTIFICATES
The effective yield to the Certificateholders of each class of Fixed Rate
Certificates will be lower than the yield otherwise produced by the applicable
Certificate Rate and the purchase price of the Certificates because
distributions will not be payable to the Certificateholders until the
Distribution Date following the month of accrual (without any additional
distribution of interest or earnings on the Certificates in respect of the
delay).
PRINCIPAL PAYMENT FEATURES OF THE CLASS AF-6 CERTIFICATES
Investors in the Class AF-6 Certificates should be aware that the Class
AF-6 Certificates generally do not receive any portion of principal payments
prior to the Distribution Date occurring in April 2005, thereafter, they will
receive an increasing percentage of their pro rata share of principal payable to
the Group I Senior Certificates based on a schedule. This percentage will, after
the Distribution Date in
S-53
March 2009, exceed their pro rata share of principal. As a result, the weighted
average life of the Class AF-6 Certificates may be longer or shorter than would
otherwise be the case, and the effect on the market value of the Class AF-6
Certificates of changes in market interest rates or market yields for similar
securities may be greater or lesser than for other classes of Offered
Certificates.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Offered Certificates purchased at a price less than par and will
decrease the yield on Offered Certificates purchased at a price greater than
par. In general, the earlier prepayments of principal occur on the Home Equity
Loans of a Home Equity Loan Group, the greater the effect on the yields of the
Offered Certificates of the related Group. The effect on an investor's yield due
to principal prepayments on the Home Equity Loans occurring at a rate that is
faster (or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the Offered Certificates will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
principal payments. The weighted average lives of the Offered Certificates of a
Group will also be affected by the amount and timing of delinquencies and
defaults on the related Home Equity Loans and the recoveries, if any, on
defaulted Home Equity Loans of the related Group and foreclosed properties.
The "weighted average life" of a Certificate refers to the average amount
of time that will elapse from the date of issuance to the date each dollar in
respect of principal of the Certificate is repaid. The weighted average life of
any class of the Offered Certificates of a Group will be influenced by, among
other factors, the rate at which principal payments are made on the related Home
Equity Loans, including final payments made upon the maturity of such Home
Equity Loans for which the related monthly payments are insufficient to fully
amortize the Home Equity Loans ("Balloon Loans").
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used with respect to the Group I Home
Equity Loans is the prepayment assumption (the "Prepayment Assumption"). A 100%
Prepayment Assumption assumes constant prepayment rates ("CPR") of 4% per annum
of the then outstanding principal balance of the Group I Home Equity Loans in
the first month of the life of the Home Equity Loans and an additional 1.455%
(precisely 16/11%) per annum in each month thereafter until the twelfth month.
Beginning in the twelfth month and in each month thereafter during the life of
the Home Equity Loans, a 100% Prepayment Assumption assumes a CPR of 20% per
annum of the outstanding principal balance of the Group I Home Equity Loans each
month. The model used with respect to the Group II Home Equity Loans is CPR,
which is a prepayment assumption that represents a constant assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of home equity loans for the life of the home equity loans. Neither model
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of home equity loans,
including the Home Equity Loans to be included in the Trust.
Since the following tables were prepared on the basis of the assumptions in
the following paragraph, there are discrepancies between characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables set forth below. Any discrepancy may have an
effect upon the percentages of the Certificate Principal Balances outstanding
and the weighted average lives of the Offered Certificates of the related Group
set forth in the tables. In addition, since the actual Home Equity Loans in the
Trust will have characteristics which differ from those assumed in preparing
S-54
the tables set forth below, the distributions of principal on the Offered
Certificates may be made earlier or later than as indicated in the tables.
The information in the decrement tables has been prepared on the basis of
the following assumed characteristics of the Home Equity Loans and the following
additional assumptions (collectively, the "Structuring Assumptions"):
- the Home Equity Loans consist of pools of loans with the amortization
characteristics set forth below,
- the Closing Date for the Offered Certificates is March 22, 2002,
- distributions on the Offered Certificates are made on the 25(th) day of
each month regardless of the day on which the Distribution Date actually
occurs, commencing on April 25, 2002 and are made in accordance with the
priorities described in this prospectus supplement,
- the scheduled monthly payments of principal and interest on the Home
Equity Loans will be timely delivered on the first day of each month
commencing on March 1, 2002 (with no defaults, delinquencies,
modifications, waivers or amendments),
- the Home Equity Loans prepay at the specified percentages of the
Prepayment Assumption, in the case of the Group I Home Equity Loans, or
at the specified percentages of CPR, in the case of the Group II Home
Equity Loans,
- all prepayments are prepayments in full received on the last day of each
month and include 30 days' interest thereon,
- the clean-up call option is not exercised (except as noted in footnote 2
in the following tables) and there is no resulting auction of the trust
assets,
- the Offered Certificates of each class have the respective Certificate
Rates and initial Certificate Principal Balances as set forth in this
prospectus supplement,
- the overcollateralization level for each Group is set as specified in
this prospectus supplement,
- the coupon rate for each Group II Home Equity Loan is adjusted on its
next adjustment date and on subsequent adjustment dates which occur at
six month intervals following the initial adjustment date to equal the
sum of the applicable gross margin and six-month LIBOR (the sum being
subject to the applicable periodic rate adjustment caps and floors and
lifetime rate caps and floors),
- six-month LIBOR remains constant at 2.24625% per annum and one-month
LIBOR remains constant at 1.90000% per annum, and
- the aggregate Servicing Fee and Trustee Fee for each Group is payable
monthly in the amount of 0.505% per annum of the outstanding principal
balance of the Home Equity Loans in the related Group as of the first day
of each Remittance Period.
S-55
GROUP I
<Table>
<Caption>
REMAINING ORIGINAL AMORTIZED
TERM TO TERM TO ORIGINAL NEXT
LOAN COUPON MATURITY MATURITY TERM PAYMENT
POOL NUMBER BALANCE($) RATE(%) (MONTHS) (MONTHS) (MONTHS) DUE DATE
- ----------- -------------- ------- --------- -------- --------- ----------
1........................................ 4,826,920.36 10.361 113 114 114 March 2002
2........................................ 11,592,613.82 9.165 179 180 360 March 2002
3........................................ 20,437,240.96 9.830 178 179 179 March 2002
4........................................ 14,981,781.83 10.355 239 240 240 March 2002
5........................................ 1,244,571.43 8.545 298 299 299 March 2002
6........................................ 103,914,021.99 8.954 359 360 360 March 2002
7........................................ 1,513,951.70 10.353 112 112 112 April 2002
8........................................ 2,869,870.14 9.913 180 180 360 April 2002
9........................................ 4,657,419.03 10.421 180 180 180 April 2002
10....................................... 4,282,244.16 10.105 240 240 240 April 2002
11....................................... 324,800.00 8.894 300 300 300 April 2002
12....................................... 18,862,969.16 9.954 360 360 360 April 2002
</Table>
GROUP II
<Table>
<Caption>
NUMBER
OF
MONTHS INITIAL
TO NEXT INTEREST PERIODIC REMAINING ORIGINAL
COUPON COUPON GROSS RATE INTEREST RATE MAXIMUM TERM TO TERM TO
POOL RATE CHANGE MARGIN ADJUSTMENT ADJUSTMENT LIFETIME MATURITY MATURITY
NUMBER LOAN BALANCE($) (%) DATE (%) CAP(%) CAP(%) RATE(%) (MONTHS) (MONTHS)
- ------ --------------- ------ ------- ------ ---------- ------------- -------- --------- --------
1.................... 22,743,613.20 9.216 22 8.219 2.110 1.000 16.156 358 360
2.................... 61,854,296.93 9.205 23 8.493 2.088 1.000 16.162 359 360
3.................... 62,482,400.45 9.581 24 9.090 2.072 1.000 16.568 360 360
4.................... 7,484,207.78 8.490 35 7.889 2.983 1.000 15.472 359 360
5.................... 8,079,112.70 9.352 36 8.863 2.939 1.000 16.352 360 360
6.................... 2,292,481.59 8.643 34 7.939 3.000 1.000 15.643 358 360
7.................... 10,987,839.16 8.896 5 8.568 1.012 1.000 15.896 345 347
8.................... 8,375,552.94 9.217 6 9.159 1.000 1.000 16.217 341 341
9.................... 39,382,487.28 9.603 24 9.142 2.053 1.000 16.600 360 360
10................... 3,645,572.40 9.576 36 9.094 3.000 1.000 16.576 360 360
11................... 6,174,029.45 9.651 6 9.673 1.000 1.000 16.651 334 334
<Caption>
INTEREST
RATE
CHANGE NEXT
POOL FREQUENCY PAYMENT
NUMBER (MONTHS) DUE DATE
- ------ --------- ----------
1.................... 6 March 2002
2.................... 6 March 2002
3.................... 6 March 2002
4.................... 6 March 2002
5.................... 6 March 2002
6.................... 6 March 2002
7.................... 6 March 2002
8.................... 6 March 2002
9.................... 6 April 2002
10................... 6 April 2002
11................... 6 April 2002
</Table>
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions, the
percentages of the initial Certificate Principal Balances of the Offered
Certificates that would be outstanding after each of the dates shown, based on
the indicated percentages of the Prepayment Assumption, in the case of the Group
I Home Equity Loans, and at the indicated percentages of CPR, in the case of the
Group II Home Equity Loans, and the weighted average lives of the Offered
Certificates. It is not likely that:
- the Home Equity Loans will have the characteristics assumed,
- the Home Equity Loans will prepay at the specified percentages of the
Prepayment Assumption or CPR or at any other constant percentage, or
- the level of one-month LIBOR or six-month LIBOR will remain constant at
the level assumed or at any other level.
Moreover, the diverse remaining terms to maturity of the Home Equity Loans
could produce slower or faster principal distributions than indicated in the
tables at the specified percentages of the Prepayment Assumption or CPR even if
the weighted average remaining term to maturity of the Home Equity Loans
S-56
is consistent with the remaining terms to maturity of the Home Equity Loans
specified in the Structuring Assumptions.
<Table>
<Caption>
PREPAYMENT SCENARIOS I II III IV V VI VII
- -------------------- --- --- ---- ---- ---- ---- ----
Group I Home Equity Loans--Prepayment
Assumption................................. 50% 75% 100% 115% 150% 175% 200%
Group II Home Equity Loans--CPR.............. 12% 18% 24% 28% 36% 50% 60%
</Table>
S-57
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS AF-1
----------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ---- ---- ---- ---- ---- ---- ----
Initial Percentage............................. 100% 100% 100% 100% 100% 100% 100%
March 25, 2003................................. 68 56 45 39 23 13 1
March 25, 2004................................. 31 6 0 0 0 0 0
March 25, 2005................................. 0 0 0 0 0 0 0
March 25, 2006................................. 0 0 0 0 0 0 0
March 25, 2007................................. 0 0 0 0 0 0 0
March 25, 2008................................. 0 0 0 0 0 0 0
March 25, 2009................................. 0 0 0 0 0 0 0
March 25, 2010................................. 0 0 0 0 0 0 0
March 25, 2011................................. 0 0 0 0 0 0 0
March 25, 2012................................. 0 0 0 0 0 0 0
March 25, 2013................................. 0 0 0 0 0 0 0
March 25, 2014................................. 0 0 0 0 0 0 0
March 25, 2015................................. 0 0 0 0 0 0 0
March 25, 2016................................. 0 0 0 0 0 0 0
March 25, 2017................................. 0 0 0 0 0 0 0
March 25, 2018................................. 0 0 0 0 0 0 0
March 25, 2019................................. 0 0 0 0 0 0 0
March 25, 2020................................. 0 0 0 0 0 0 0
March 25, 2021................................. 0 0 0 0 0 0 0
March 25, 2022................................. 0 0 0 0 0 0 0
March 25, 2023................................. 0 0 0 0 0 0 0
March 25, 2024................................. 0 0 0 0 0 0 0
March 25, 2025................................. 0 0 0 0 0 0 0
March 25, 2026................................. 0 0 0 0 0 0 0
March 25, 2027................................. 0 0 0 0 0 0 0
March 25, 2028................................. 0 0 0 0 0 0 0
March 25, 2029................................. 0 0 0 0 0 0 0
March 25, 2030................................. 0 0 0 0 0 0 0
March 25, 2031................................. 0 0 0 0 0 0 0
March 25, 2032................................. 0 0 0 0 0 0 0
Weighted Average Life *(1)..................... 1.57 1.19 0.99 0.91 0.78 0.71 0.66
Weighted Average Life *(2)..................... 1.57 1.19 0.99 0.91 0.78 0.71 0.66
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-58
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS AF-2
----------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ---- ---- ---- ---- ---- ---- ----
Initial Percentage............................. 100% 100% 100% 100% 100% 100% 100%
March 25, 2003................................. 100 100 100 100 100 100 100
March 25, 2004................................. 100 100 69 44 0 0 0
March 25, 2005................................. 98 37 0 0 0 0 0
March 25, 2006................................. 50 0 0 0 0 0 0
March 25, 2007................................. 8 0 0 0 0 0 0
March 25, 2008................................. 0 0 0 0 0 0 0
March 25, 2009................................. 0 0 0 0 0 0 0
March 25, 2010................................. 0 0 0 0 0 0 0
March 25, 2011................................. 0 0 0 0 0 0 0
March 25, 2012................................. 0 0 0 0 0 0 0
March 25, 2013................................. 0 0 0 0 0 0 0
March 25, 2014................................. 0 0 0 0 0 0 0
March 25, 2015................................. 0 0 0 0 0 0 0
March 25, 2016................................. 0 0 0 0 0 0 0
March 25, 2017................................. 0 0 0 0 0 0 0
March 25, 2018................................. 0 0 0 0 0 0 0
March 25, 2019................................. 0 0 0 0 0 0 0
March 25, 2020................................. 0 0 0 0 0 0 0
March 25, 2021................................. 0 0 0 0 0 0 0
March 25, 2022................................. 0 0 0 0 0 0 0
March 25, 2023................................. 0 0 0 0 0 0 0
March 25, 2024................................. 0 0 0 0 0 0 0
March 25, 2025................................. 0 0 0 0 0 0 0
March 25, 2026................................. 0 0 0 0 0 0 0
March 25, 2027................................. 0 0 0 0 0 0 0
March 25, 2028................................. 0 0 0 0 0 0 0
March 25, 2029................................. 0 0 0 0 0 0 0
March 25, 2030................................. 0 0 0 0 0 0 0
March 25, 2031................................. 0 0 0 0 0 0 0
March 25, 2032................................. 0 0 0 0 0 0 0
Weighted Average Life *(1)..................... 4.08 2.88 2.26 2.01 1.61 1.42 1.28
Weighted Average Life *(2)..................... 4.08 2.88 2.26 2.01 1.61 1.42 1.28
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-59
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS AF-3
----------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ---- ---- ---- ---- ---- ---- ----
Initial Percentage............................. 100% 100% 100% 100% 100% 100% 100%
March 25, 2003................................. 100 100 100 100 100 100 100
March 25, 2004................................. 100 100 100 100 87 42 0
March 25, 2005................................. 100 100 76 38 0 0 0
March 25, 2006................................. 100 74 16 0 0 0 0
March 25, 2007................................. 100 28 0 0 0 0 0
March 25, 2008................................. 66 0 0 0 0 0 0
March 25, 2009................................. 40 0 0 0 0 0 0
March 25, 2010................................. 25 0 0 0 0 0 0
March 25, 2011................................. 9 0 0 0 0 0 0
March 25, 2012................................. 0 0 0 0 0 0 0
March 25, 2013................................. 0 0 0 0 0 0 0
March 25, 2014................................. 0 0 0 0 0 0 0
March 25, 2015................................. 0 0 0 0 0 0 0
March 25, 2016................................. 0 0 0 0 0 0 0
March 25, 2017................................. 0 0 0 0 0 0 0
March 25, 2018................................. 0 0 0 0 0 0 0
March 25, 2019................................. 0 0 0 0 0 0 0
March 25, 2020................................. 0 0 0 0 0 0 0
March 25, 2021................................. 0 0 0 0 0 0 0
March 25, 2022................................. 0 0 0 0 0 0 0
March 25, 2023................................. 0 0 0 0 0 0 0
March 25, 2024................................. 0 0 0 0 0 0 0
March 25, 2025................................. 0 0 0 0 0 0 0
March 25, 2026................................. 0 0 0 0 0 0 0
March 25, 2027................................. 0 0 0 0 0 0 0
March 25, 2028................................. 0 0 0 0 0 0 0
March 25, 2029................................. 0 0 0 0 0 0 0
March 25, 2030................................. 0 0 0 0 0 0 0
March 25, 2031................................. 0 0 0 0 0 0 0
March 25, 2032................................. 0 0 0 0 0 0 0
Weighted Average Life *(1)..................... 6.96 4.61 3.47 3.02 2.31 2.01 1.77
Weighted Average Life *(2)..................... 6.96 4.61 3.47 3.02 2.31 2.01 1.77
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-60
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS AF-4
-----------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ----- ---- ---- ---- ---- ---- ----
Initial Percentage............................ 100% 100% 100% 100% 100% 100% 100%
March 25, 2003................................ 100 100 100 100 100 100 100
March 25, 2004................................ 100 100 100 100 100 100 99
March 25, 2005................................ 100 100 100 100 67 28 0
March 25, 2006................................ 100 100 100 90 45 10 0
March 25, 2007................................ 100 100 79 58 16 0 0
March 25, 2008................................ 100 97 57 37 0 0 0
March 25, 2009................................ 100 78 39 16 0 0 0
March 25, 2010................................ 100 70 29 7 0 0 0
March 25, 2011................................ 100 58 11 0 0 0 0
March 25, 2012................................ 94 39 0 0 0 0 0
March 25, 2013................................ 82 21 0 0 0 0 0
March 25, 2014................................ 70 4 0 0 0 0 0
March 25, 2015................................ 55 0 0 0 0 0 0
March 25, 2016................................ 38 0 0 0 0 0 0
March 25, 2017................................ 15 0 0 0 0 0 0
March 25, 2018................................ 1 0 0 0 0 0 0
March 25, 2019................................ 0 0 0 0 0 0 0
March 25, 2020................................ 0 0 0 0 0 0 0
March 25, 2021................................ 0 0 0 0 0 0 0
March 25, 2022................................ 0 0 0 0 0 0 0
March 25, 2023................................ 0 0 0 0 0 0 0
March 25, 2024................................ 0 0 0 0 0 0 0
March 25, 2025................................ 0 0 0 0 0 0 0
March 25, 2026................................ 0 0 0 0 0 0 0
March 25, 2027................................ 0 0 0 0 0 0 0
March 25, 2028................................ 0 0 0 0 0 0 0
March 25, 2029................................ 0 0 0 0 0 0 0
March 25, 2030................................ 0 0 0 0 0 0 0
March 25, 2031................................ 0 0 0 0 0 0 0
March 25, 2032................................ 0 0 0 0 0 0 0
Weighted Average Life *(1).................... 13.13 9.22 6.73 5.65 3.95 3.01 2.47
Weighted Average Life *(2).................... 11.76 7.92 5.82 4.97 3.64 2.78 2.40
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-61
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS AF-5
-------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ----- ----- ----- ---- ---- ---- ----
Initial Percentage................................ 100% 100% 100% 100% 100% 100% 100%
March 25, 2003.................................... 100 100 100 100 100 100 100
March 25, 2004.................................... 100 100 100 100 100 100 100
March 25, 2005.................................... 100 100 100 100 100 100 51
March 25, 2006.................................... 100 100 100 100 100 100 0
March 25, 2007.................................... 100 100 100 100 100 0 0
March 25, 2008.................................... 100 100 100 100 77 0 0
March 25, 2009.................................... 100 100 100 100 19 0 0
March 25, 2010.................................... 100 100 100 100 0 0 0
March 25, 2011.................................... 100 100 100 33 0 0 0
March 25, 2012.................................... 100 100 57 0 0 0 0
March 25, 2013.................................... 100 100 0 0 0 0 0
March 25, 2014.................................... 100 100 0 0 0 0 0
March 25, 2015.................................... 100 33 0 0 0 0 0
March 25, 2016.................................... 100 0 0 0 0 0 0
March 25, 2017.................................... 100 0 0 0 0 0 0
March 25, 2018.................................... 100 0 0 0 0 0 0
March 25, 2019.................................... 39 0 0 0 0 0 0
March 25, 2020.................................... 0 0 0 0 0 0 0
March 25, 2021.................................... 0 0 0 0 0 0 0
March 25, 2022.................................... 0 0 0 0 0 0 0
March 25, 2023.................................... 0 0 0 0 0 0 0
March 25, 2024.................................... 0 0 0 0 0 0 0
March 25, 2025.................................... 0 0 0 0 0 0 0
March 25, 2026.................................... 0 0 0 0 0 0 0
March 25, 2027.................................... 0 0 0 0 0 0 0
March 25, 2028.................................... 0 0 0 0 0 0 0
March 25, 2029.................................... 0 0 0 0 0 0 0
March 25, 2030.................................... 0 0 0 0 0 0 0
March 25, 2031.................................... 0 0 0 0 0 0 0
March 25, 2032.................................... 0 0 0 0 0 0 0
Weighted Average Life *(1)........................ 16.89 12.87 10.13 8.90 6.55 4.57 3.07
Weighted Average Life *(2)........................ 12.18 8.42 6.34 5.43 4.18 3.09 2.59
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-62
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS AF-6
----------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ---- ---- ---- ---- ---- ---- ----
Initial Percentage............................. 100% 100% 100% 100% 100% 100% 100%
March 25, 2003................................. 100 100 100 100 100 100 100
March 25, 2004................................. 100 100 100 100 100 100 100
March 25, 2005................................. 100 100 100 100 100 100 100
March 25, 2006................................. 93 90 89 89 91 88 0
March 25, 2007................................. 86 82 80 78 75 47 0
March 25, 2008................................. 75 71 65 61 42 0 0
March 25, 2009................................. 66 58 49 37 10 0 0
March 25, 2010................................. 44 33 12 4 0 0 0
March 25, 2011................................. 29 17 2 ** 0 0 0
March 25, 2012................................. 19 6 ** 0 0 0 0
March 25, 2013................................. 12 1 0 0 0 0 0
March 25, 2014................................. 8 ** 0 0 0 0 0
March 25, 2015................................. 4 ** 0 0 0 0 0
March 25, 2016................................. 2 0 0 0 0 0 0
March 25, 2017................................. ** 0 0 0 0 0 0
March 25, 2018................................. ** 0 0 0 0 0 0
March 25, 2019................................. ** 0 0 0 0 0 0
March 25, 2020................................. 0 0 0 0 0 0 0
March 25, 2021................................. 0 0 0 0 0 0 0
March 25, 2022................................. 0 0 0 0 0 0 0
March 25, 2023................................. 0 0 0 0 0 0 0
March 25, 2024................................. 0 0 0 0 0 0 0
March 25, 2025................................. 0 0 0 0 0 0 0
March 25, 2026................................. 0 0 0 0 0 0 0
March 25, 2027................................. 0 0 0 0 0 0 0
March 25, 2028................................. 0 0 0 0 0 0 0
March 25, 2029................................. 0 0 0 0 0 0 0
March 25, 2030................................. 0 0 0 0 0 0 0
March 25, 2031................................. 0 0 0 0 0 0 0
March 25, 2032................................. 0 0 0 0 0 0 0
Weighted Average Life *(1)..................... 7.90 7.08 6.46 6.19 5.69 4.90 3.51
Weighted Average Life *(2)..................... 7.81 6.81 5.73 5.11 4.13 3.09 2.59
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
** Means less than 1% but greater than 0%.
(1) To maturity.
(2) To optional termination.
S-63
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS MF-1
-----------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ----- ---- ---- ---- ---- ---- ----
Initial Percentage............................ 100% 100% 100% 100% 100% 100% 100%
March 25, 2003................................ 100 100 100 100 100 100 100
March 25, 2004................................ 100 100 100 100 100 100 100
March 25, 2005................................ 100 100 100 100 100 100 100
March 25, 2006................................ 100 100 84 73 52 60 80
March 25, 2007................................ 100 87 66 55 37 60 0
March 25, 2008................................ 99 72 51 41 37 43 0
March 25, 2009................................ 87 60 41 41 37 0 0
March 25, 2010................................ 76 49 41 41 9 0 0
March 25, 2011................................ 66 41 41 41 0 0 0
March 25, 2012................................ 58 41 41 10 0 0 0
March 25, 2013................................ 50 41 23 0 0 0 0
March 25, 2014................................ 43 41 0 0 0 0 0
March 25, 2015................................ 39 41 0 0 0 0 0
March 25, 2016................................ 39 18 0 0 0 0 0
March 25, 2017................................ 39 0 0 0 0 0 0
March 25, 2018................................ 39 0 0 0 0 0 0
March 25, 2019................................ 39 0 0 0 0 0 0
March 25, 2020................................ 27 0 0 0 0 0 0
March 25, 2021................................ 0 0 0 0 0 0 0
March 25, 2022................................ 0 0 0 0 0 0 0
March 25, 2023................................ 0 0 0 0 0 0 0
March 25, 2024................................ 0 0 0 0 0 0 0
March 25, 2025................................ 0 0 0 0 0 0 0
March 25, 2026................................ 0 0 0 0 0 0 0
March 25, 2027................................ 0 0 0 0 0 0 0
March 25, 2028................................ 0 0 0 0 0 0 0
March 25, 2029................................ 0 0 0 0 0 0 0
March 25, 2030................................ 0 0 0 0 0 0 0
March 25, 2031................................ 0 0 0 0 0 0 0
March 25, 2032................................ 0 0 0 0 0 0 0
Weighted Average Life *(1).................... 12.59 9.44 7.43 6.54 5.24 5.18 4.27
Weighted Average Life *(2).................... 10.19 7.17 5.46 4.73 3.83 3.09 2.59
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-64
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS MF-2
-----------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ----- ---- ---- ---- ---- ---- ----
Initial Percentage............................ 100% 100% 100% 100% 100% 100% 100%
March 25, 2003................................ 100 100 100 100 100 100 100
March 25, 2004................................ 100 100 100 100 100 100 100
March 25, 2005................................ 100 100 100 100 100 100 100
March 25, 2006................................ 100 100 84 73 52 41 100
March 25, 2007................................ 100 87 66 55 36 41 54
March 25, 2008................................ 99 72 51 41 36 41 0
March 25, 2009................................ 87 60 40 40 36 23 0
March 25, 2010................................ 76 49 40 40 36 0 0
March 25, 2011................................ 66 41 40 40 3 0 0
March 25, 2012................................ 58 40 40 40 0 0 0
March 25, 2013................................ 50 40 40 11 0 0 0
March 25, 2014................................ 43 40 25 0 0 0 0
March 25, 2015................................ 39 40 0 0 0 0 0
March 25, 2016................................ 39 40 0 0 0 0 0
March 25, 2017................................ 39 14 0 0 0 0 0
March 25, 2018................................ 39 0 0 0 0 0 0
March 25, 2019................................ 39 0 0 0 0 0 0
March 25, 2020................................ 39 0 0 0 0 0 0
March 25, 2021................................ 37 0 0 0 0 0 0
March 25, 2022................................ 7 0 0 0 0 0 0
March 25, 2023................................ 0 0 0 0 0 0 0
March 25, 2024................................ 0 0 0 0 0 0 0
March 25, 2025................................ 0 0 0 0 0 0 0
March 25, 2026................................ 0 0 0 0 0 0 0
March 25, 2027................................ 0 0 0 0 0 0 0
March 25, 2028................................ 0 0 0 0 0 0 0
March 25, 2029................................ 0 0 0 0 0 0 0
March 25, 2030................................ 0 0 0 0 0 0 0
March 25, 2031................................ 0 0 0 0 0 0 0
March 25, 2032................................ 0 0 0 0 0 0 0
Weighted Average Life *(1).................... 13.08 9.83 7.83 6.92 5.47 4.92 5.11
Weighted Average Life *(2).................... 10.19 7.17 5.46 4.73 3.79 3.09 2.59
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-65
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS BF
------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ----- ----- ---- ---- ---- ---- ----
Initial Percentage........................... 100% 100% 100% 100% 100% 100% 100%
March 25, 2003............................... 100 100 100 100 100 100 100
March 25, 2004............................... 100 100 100 100 100 100 100
March 25, 2005............................... 100 100 100 100 100 100 100
March 25, 2006............................... 100 100 84 73 52 41 100
March 25, 2007............................... 100 87 66 55 36 41 100
March 25, 2008............................... 99 72 51 41 36 41 56
March 25, 2009............................... 87 60 40 40 36 41 0
March 25, 2010............................... 76 49 39 40 36 8 0
March 25, 2011............................... 66 41 39 40 36 0 0
March 25, 2012............................... 58 40 39 40 0 0 0
March 25, 2013............................... 50 40 39 40 0 0 0
March 25, 2014............................... 43 40 39 8 0 0 0
March 25, 2015............................... 39 40 27 0 0 0 0
March 25, 2016............................... 39 40 0 0 0 0 0
March 25, 2017............................... 39 40 0 0 0 0 0
March 25, 2018............................... 39 16 0 0 0 0 0
March 25, 2019............................... 39 0 0 0 0 0 0
March 25, 2020............................... 39 0 0 0 0 0 0
March 25, 2021............................... 39 0 0 0 0 0 0
March 25, 2022............................... 39 0 0 0 0 0 0
March 25, 2023............................... 12 0 0 0 0 0 0
March 25, 2024............................... 0 0 0 0 0 0 0
March 25, 2025............................... 0 0 0 0 0 0 0
March 25, 2026............................... 0 0 0 0 0 0 0
March 25, 2027............................... 0 0 0 0 0 0 0
March 25, 2028............................... 0 0 0 0 0 0 0
March 25, 2029............................... 0 0 0 0 0 0 0
March 25, 2030............................... 0 0 0 0 0 0 0
March 25, 2031............................... 0 0 0 0 0 0 0
March 25, 2032............................... 0 0 0 0 0 0 0
Weighted Average Life *(1)................... 13.55 10.19 8.20 7.28 5.71 5.13 6.14
Weighted Average Life *(2)................... 10.19 7.17 5.46 4.73 3.76 3.09 2.59
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-66
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS AV
-----------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ----- ---- ---- ---- ---- ---- ----
Initial Percentage........................... 100% 100% 100% 100% 100% 100% 100%
March 25, 2003............................... 82 75 68 63 54 37 25
March 25, 2004............................... 69 57 45 38 25 6 0
March 25, 2005............................... 57 42 28 21 7 0 0
March 25, 2006............................... 47 32 24 19 7 0 0
March 25, 2007............................... 38 26 18 14 3 0 0
March 25, 2008............................... 33 21 14 9 0 0 0
March 25, 2009............................... 28 17 9 3 0 0 0
March 25, 2010............................... 25 14 3 0 0 0 0
March 25, 2011............................... 22 10 0 0 0 0 0
March 25, 2012............................... 19 5 0 0 0 0 0
March 25, 2013............................... 16 1 0 0 0 0 0
March 25, 2014............................... 14 0 0 0 0 0 0
March 25, 2015............................... 10 0 0 0 0 0 0
March 25, 2016............................... 6 0 0 0 0 0 0
March 25, 2017............................... 2 0 0 0 0 0 0
March 25, 2018............................... 0 0 0 0 0 0 0
March 25, 2019............................... 0 0 0 0 0 0 0
March 25, 2020............................... 0 0 0 0 0 0 0
March 25, 2021............................... 0 0 0 0 0 0 0
March 25, 2022............................... 0 0 0 0 0 0 0
March 25, 2023............................... 0 0 0 0 0 0 0
March 25, 2024............................... 0 0 0 0 0 0 0
March 25, 2025............................... 0 0 0 0 0 0 0
March 25, 2026............................... 0 0 0 0 0 0 0
March 25, 2027............................... 0 0 0 0 0 0 0
March 25, 2028............................... 0 0 0 0 0 0 0
March 25, 2029............................... 0 0 0 0 0 0 0
March 25, 2030............................... 0 0 0 0 0 0 0
March 25, 2031............................... 0 0 0 0 0 0 0
March 25, 2032............................... 0 0 0 0 0 0 0
Weighted Average Life *(1)................... 5.23 3.56 2.64 2.21 1.49 0.92 0.72
Weighted Average Life *(2)................... 5.00 3.37 2.49 2.07 1.43 0.92 0.72
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-67
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS MV-1
-----------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ----- ---- ---- ---- ---- ---- ----
Initial Percentage........................... 100% 100% 100% 100% 100% 100% 100%
March 25, 2003............................... 100 100 100 100 100 100 100
March 25, 2004............................... 100 100 100 100 100 100 83
March 25, 2005............................... 100 100 100 100 100 97 62
March 25, 2006............................... 100 88 65 53 86 52 12
March 25, 2007............................... 100 72 49 38 52 5 0
March 25, 2008............................... 89 59 37 28 29 0 0
March 25, 2009............................... 78 48 30 28 0 0 0
March 25, 2010............................... 68 39 30 15 0 0 0
March 25, 2011............................... 59 33 22 0 0 0 0
March 25, 2012............................... 51 33 0 0 0 0 0
March 25, 2013............................... 44 33 0 0 0 0 0
March 25, 2014............................... 38 8 0 0 0 0 0
March 25, 2015............................... 36 0 0 0 0 0 0
March 25, 2016............................... 36 0 0 0 0 0 0
March 25, 2017............................... 36 0 0 0 0 0 0
March 25, 2018............................... 22 0 0 0 0 0 0
March 25, 2019............................... 0 0 0 0 0 0 0
March 25, 2020............................... 0 0 0 0 0 0 0
March 25, 2021............................... 0 0 0 0 0 0 0
March 25, 2022............................... 0 0 0 0 0 0 0
March 25, 2023............................... 0 0 0 0 0 0 0
March 25, 2024............................... 0 0 0 0 0 0 0
March 25, 2025............................... 0 0 0 0 0 0 0
March 25, 2026............................... 0 0 0 0 0 0 0
March 25, 2027............................... 0 0 0 0 0 0 0
March 25, 2028............................... 0 0 0 0 0 0 0
March 25, 2029............................... 0 0 0 0 0 0 0
March 25, 2030............................... 0 0 0 0 0 0 0
March 25, 2031............................... 0 0 0 0 0 0 0
March 25, 2032............................... 0 0 0 0 0 0 0
Weighted Average Life *(1)................... 11.12 7.68 5.85 5.21 5.21 4.11 3.18
Weighted Average Life *(2)................... 9.69 6.56 4.96 4.45 4.14 3.07 2.46
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-68
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS MV-2
----------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ----- ---- ---- --- ---- ---- ----
Initial Percentage............................ 100% 100% 100% 100% 100% 100% 100%
March 25, 2003................................ 100 100 100 100 100 100 100
March 25, 2004................................ 100 100 100 100 100 100 100
March 25, 2005................................ 100 100 100 100 100 62 13
March 25, 2006................................ 100 88 65 53 33 15 9
March 25, 2007................................ 100 72 49 38 24 15 0
March 25, 2008................................ 89 59 37 28 24 0 0
March 25, 2009................................ 78 48 30 28 11 0 0
March 25, 2010................................ 68 39 30 28 0 0 0
March 25, 2011................................ 59 33 30 3 0 0 0
March 25, 2012................................ 51 33 14 0 0 0 0
March 25, 2013................................ 44 33 0 0 0 0 0
March 25, 2014................................ 38 33 0 0 0 0 0
March 25, 2015................................ 36 2 0 0 0 0 0
March 25, 2016................................ 36 0 0 0 0 0 0
March 25, 2017................................ 36 0 0 0 0 0 0
March 25, 2018................................ 36 0 0 0 0 0 0
March 25, 2019................................ 21 0 0 0 0 0 0
March 25, 2020................................ 0 0 0 0 0 0 0
March 25, 2021................................ 0 0 0 0 0 0 0
March 25, 2022................................ 0 0 0 0 0 0 0
March 25, 2023................................ 0 0 0 0 0 0 0
March 25, 2024................................ 0 0 0 0 0 0 0
March 25, 2025................................ 0 0 0 0 0 0 0
March 25, 2026................................ 0 0 0 0 0 0 0
March 25, 2027................................ 0 0 0 0 0 0 0
March 25, 2028................................ 0 0 0 0 0 0 0
March 25, 2029................................ 0 0 0 0 0 0 0
March 25, 2030................................ 0 0 0 0 0 0 0
March 25, 2031................................ 0 0 0 0 0 0 0
March 25, 2032................................ 0 0 0 0 0 0 0
Weighted Average Life *(1).................... 11.46 7.98 6.04 5.30 4.53 3.45 2.72
Weighted Average Life *(2).................... 9.69 6.56 4.93 4.34 3.82 3.02 2.48
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
S-69
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<Table>
<Caption>
CLASS BV
-----------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- ----- ---- ---- ---- ---- ---- ----
Initial Percentage........................... 100% 100% 100% 100% 100% 100% 100%
March 25, 2003............................... 100 100 100 100 100 100 100
March 25, 2004............................... 100 100 100 100 100 100 74
March 25, 2005............................... 100 100 100 100 100 25 8
March 25, 2006............................... 100 88 65 53 33 9 2
March 25, 2007............................... 100 72 49 38 24 9 0
March 25, 2008............................... 89 59 37 28 24 0 0
March 25, 2009............................... 78 48 30 28 24 0 0
March 25, 2010............................... 68 39 30 28 0 0 0
March 25, 2011............................... 59 33 30 28 0 0 0
March 25, 2012............................... 51 33 30 0 0 0 0
March 25, 2013............................... 44 33 5 0 0 0 0
March 25, 2014............................... 38 33 0 0 0 0 0
March 25, 2015............................... 36 33 0 0 0 0 0
March 25, 2016............................... 36 0 0 0 0 0 0
March 25, 2017............................... 36 0 0 0 0 0 0
March 25, 2018............................... 36 0 0 0 0 0 0
March 25, 2019............................... 36 0 0 0 0 0 0
March 25, 2020............................... 15 0 0 0 0 0 0
March 25, 2021............................... 0 0 0 0 0 0 0
March 25, 2022............................... 0 0 0 0 0 0 0
March 25, 2023............................... 0 0 0 0 0 0 0
March 25, 2024............................... 0 0 0 0 0 0 0
March 25, 2025............................... 0 0 0 0 0 0 0
March 25, 2026............................... 0 0 0 0 0 0 0
March 25, 2027............................... 0 0 0 0 0 0 0
March 25, 2028............................... 0 0 0 0 0 0 0
March 25, 2029............................... 0 0 0 0 0 0 0
March 25, 2030............................... 0 0 0 0 0 0 0
March 25, 2031............................... 0 0 0 0 0 0 0
March 25, 2032............................... 0 0 0 0 0 0 0
Weighted Average Life *(1)................... 11.77 8.23 6.26 5.44 4.46 3.07 2.32
Weighted Average Life *(2)................... 9.69 6.56 4.91 4.29 3.62 2.76 2.21
</Table>
- ------------------------------
* The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination.
The above tables have been prepared based on the Structuring Assumptions
described above (including the assumptions regarding the characteristics and
performance of the Home Equity Loans, which differ from the actual
characteristics and performance of the Home Equity Loans) and should be read in
conjunction with those Structuring Assumptions.
S-70
SPECIAL YIELD CONSIDERATIONS RELATING TO THE CLASS A-IO CERTIFICATES
Investors should note that the Class A-IO Certificates are entitled to
distributions only through the 20th Distribution Date (except for any class
interest carryover shortfalls). In addition, if, at any time on or prior to the
Monthly Remittance Date in the month preceding the 20th Distribution Date the
aggregate Loan Balance of the Group I Home Equity Loans is reduced to or below
the scheduled notional amount of the Group I A-IO component or the aggregate
Loan Balance of the Group II Home Equity Loans is reduced to or below the
scheduled notional amount of the Group II A-IO component, respectively, the
yield to investors in the Class A-IO Certificates will be extremely sensitive to
the rate and timing of principal payments on the Home Equity Loans (including
prepayments, defaults and liquidations), which rate may fluctuate significantly
over time. Further, if the clean-up call option is exercised or the trust assets
are sold pursuant to the auction process prior to the 20th Distribution Date,
then the Class A-IO Certificates will receive no further distributions.
Investors in the Class A-IO Certificates should consider the risk that an
extremely rapid rate of prepayments on the Home Equity Loans could result in the
failure of such investors to fully recover their investments.
Based on the Structuring Assumptions, and further assuming (1) prepayments
of approximately 65.9% CPR for Group I and Group II, respectively, (2) that the
clean-up call option is exercised on the date on which it first could have been
exercised and (3) an assumed purchase price of $5,524,376 for the Class A-IO
Certificates, the pre-tax yield to maturity of the Class A-IO Certificates would
be less than 0%. If the actual prepayment rate on the Home Equity Loans were to
exceed the rate stated above, then assuming the Home Equity Loans behave in
conformity with all other Structuring Assumptions, initial investors in the
Class A-IO Certificates would not fully recover their initial investment. Timing
of changes in the rate of prepayments may significantly affect the actual yield
to investors, even if the average rate of principal prepayments is consistent
with the expectations of investors. Investors must make their own decisions as
to the appropriate prepayment assumption to be used in deciding whether to
purchase any Class A-IO Certificates.
The 0% pre-tax yield described above was calculated by determining the
monthly discount rates which, when applied to the assumed stream of cash flow to
be paid on the Class A-IO Certificates, would cause the discounted present value
of such assumed stream of cash flow to the Closing Date to equal the assumed
purchase price (which includes accrued interest), and converting such monthly
rate to a corporate bond equivalent rate. Such calculations do not take into
account the interest rates at which funds received by holders of the Class A-IO
Certificates may be reinvested and consequently do not purport to reflect the
return on any investment in the Class A-IO Certificates when such reinvestment
rates are considered.
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement (the "Agreement") dated as of March 1, 2002 among the
Depositor, CHEC and Harwood Street Funding II, LLC as sellers, CHEC as servicer
(in this capacity, the "Servicer") and JPMorgan Chase Bank as trustee (the
"Trustee"). On the Closing Date, the Sellers will transfer without recourse the
Home Equity Loans to the Depositor, the Depositor will convey without recourse
the Home Equity Loans to the Trust and the Trust will issue the Offered
Certificates, the Class X-IO Certificates and the Class R Certificates at the
direction of the Depositor.
The property of the Trust will include all
(a) the Home Equity Loans together with the related Home Equity Loan
documents, each Seller's interest in any Mortgaged Property which
secures a Home Equity Loan, all payments on each Home Equity Loan on
or after the opening of business on March 1, 2002 or, with respect to
any Home Equity Loan originated after that date but prior to the
Closing Date, the date of
S-71
origination of that Home Equity Loan (the "Cut-Off Date") and proceeds
of the conversion, voluntary or involuntary, of the foregoing,
(b) the amounts as may be held by the Trustee in the Certificate Account
and any other accounts held by the Trustee for the Trust together with
investment earnings on those amounts, and the amounts as may be held
by the Servicer in the Principal and Interest Account (as defined in
the prospectus), if any, inclusive of investment earnings on those
amounts whether in the form of cash, instruments, securities or other
properties, and
(c) proceeds of all the foregoing (including, but not by way of
limitation, all proceeds of any mortgage insurance, hazard insurance
and title insurance policy relating to the Home Equity Loans, cash
proceeds, accounts, accounts receivable, notes, drafts, acceptances,
chattel paper, checks, deposit accounts, rights to payment of any and
every kind, and other forms of obligations and receivables which at
any time constitute all or part of or are included in the proceeds of
any of the foregoing) to pay the Certificates as specified in the
Agreement.
As described in the Agreement, the Trustee and the Servicer shall each receive
specified investment earnings on amounts on deposit in the Certificate Account
as additional compensation and the Servicer shall receive any investment
earnings on amounts on deposit in the Principal and Interest Account.
The Offered Certificates will not represent an interest in or an obligation
of, nor will the Home Equity Loans be guaranteed by, the Depositor, the Sellers,
the Servicer, the Trustee or any of their affiliates.
Prior to the Closing Date, the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Home Equity Loans,
issuing the Certificates and distributing payments on the Certificates. The
Trust will not acquire any receivables or assets other than the Home Equity
Loans and their proceeds and rights appurtenant to them. To the extent that
borrowers make scheduled payments under the Home Equity Loans, the Trust will
have sufficient liquidity to make distributions on the Certificates. As the
Trust does not have any operating history and will not engage in any business
activity other than issuing the Certificates and making distributions on the
Certificates, there has not been included any historical or pro forma ratio of
earnings to fixed charges with respect to the Trust.
S-72
DESCRIPTION OF THE CERTIFICATES
Pursuant to the Agreement the Trust will issue on the Closing Date the
Centex Home Equity Loan Asset-Backed Certificates, Series 2002-B, Class AF-1
Certificates, Class AF-2 Certificates, Class AF-3 Certificates, Class AF-4
Certificates, Class AF-5 Certificates, Class AF-6 Certificates, Class A-IO
Certificates, Class MF-1 Certificates, Class MF-2 Certificates and Class BF
Certificates (the "Fixed Rate Certificates") and the Class AV Certificates,
Class MV-1 Certificates, Class MV-2 Certificates and Class BV Certificates (the
"Variable Rate Certificates") (collectively referred to as the "Offered
Certificates"). The Trust will also issue on the Closing Date the Class X-IO
Certificates (the "Class X-IO Certificates") and three residual classes of
certificates (together, the "Class R Certificates," and together with the Class
X-IO Certificates, the "Non-Offered Certificates" and together with the Offered
Certificates, the "Certificates"). Only the Offered Certificates are being
offered pursuant to this prospectus supplement. The Class AF-1 Certificates,
Class AF-2 Certificates, Class AF-3 Certificates, Class AF-4 Certificates, Class
AF-5 Certificates, Class AF-6 Certificates, Class A-IO Certificates and Class AV
Certificates are sometimes referred to as the "Senior Certificates" and the
Class MF-1 Certificates, Class MF-2 Certificates, Class MV-1 Certificates, Class
MV-2 Certificates, Class BF Certificates and Class BV Certificates are sometimes
referred to as the "Subordinate Certificates." The Class AF-1 Certificates,
Class AF-2 Certificates, Class AF-3 Certificates, Class AF-4 Certificates, Class
AF-5 Certificates, Class AF-6 Certificates, Class MF-1 Certificates, Class MF-2
Certificates, Class BF Certificates and the Group I A-IO component are sometimes
referred to as the "Group I Certificates." The Class AV Certificates, Class MV-1
Certificates, Class MV-2 Certificates, Class BV Certificates and the Group II
A-IO component are sometimes referred to as the "Group II Certificates".
References to "Class M-1 Certificates," "Class M-2 Certificates" and "Class B
Certificates" are, as the context requires, references to the certificates of
either or both Groups of similar designation. Each of the Group I Certificates
and the Group II Certificates are sometimes referred to as a "Certificate Group"
or "Group." The form of the Agreement has been filed as an exhibit to the
registration statement of which this prospectus supplement and the prospectus
are a part. The following summaries describe important provisions of the
Agreement. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement. Wherever particular sections or defined terms of the Agreement are
referred to, the sections or defined terms are incorporated in this prospectus
supplement by reference.
S-73
The Class A-IO Certificates (the "Class A-IO Certificates") will consist of
the Group I A-IO component and the Group II A-IO component. The Class A-IO
Certificates will not have a Certificate Principal Balance but will have, for
the related Distribution Date, a notional amount for each Group A-IO component
(the related "Notional Amount"), each of which will be equal to the lesser of:
(i) the aggregate Loan Balance of the Home Equity Loans in the related
Group and
(ii) the scheduled notional amount for the related Distribution Date set
forth below.
<Table>
<Caption>
GROUP I A-IO GROUP II A-IO
DISTRIBUTION DATE COMPONENT NOTIONAL AMOUNT COMPONENT NOTIONAL AMOUNT
- ----------------- ------------------------- -------------------------
April 25, 2002 $48,000,000 $56,000,000
May 25, 2002 $48,000,000 $56,000,000
June 25, 2002 $45,000,000 $52,000,000
July 25, 2002 $41,000,000 $48,000,000
August 25, 2002 $38,000,000 $45,000,000
September 25, 2002 $35,000,000 $43,000,000
October 25, 2002 $33,000,000 $40,000,000
November 25, 2002 $30,000,000 $38,000,000
December 25, 2002 $28,000,000 $35,000,000
January 25, 2003 $26,000,000 $32,000,000
February 25, 2003 $24,000,000 $30,000,000
March 25, 2003 $22,000,000 $28,000,000
April 25, 2003 $20,000,000 $27,000,000
May 25, 2003 $19,000,000 $25,000,000
June 25, 2003 $17,000,000 $23,000,000
July 25, 2003 $16,000,000 $22,000,000
August 25, 2003 $15,000,000 $20,000,000
September 25, 2003 $14,000,000 $18,000,000
October 25, 2003 $13,000,000 $17,000,000
November 25, 2003 $12,000,000 $16,000,000
</Table>
The Group I A-IO component and the Group II A-IO component may not be
traded separately.
The Offered Certificates will be issued in denominations of $25,000 and
multiples of $1,000 in excess of $25,000 and will evidence specified undivided
interests in the Trust. Definitive Certificates will be transferable and
exchangeable at the corporate trust office of the Trustee, which will initially
act as Certificate Registrar.
We refer you to "--Book-Entry Certificates" below for more detail.
No service charge will be made for any registration of exchange or transfer
of Certificates, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge.
The Group I Certificates will receive distributions primarily based upon
collections on the Home Equity Loans in Group I. The Group II Certificates will
receive distributions primarily based upon collections on the Home Equity Loans
in Group II.
The principal amount of a class of Offered Certificates, other than the
Class A-IO Certificates, (each, a "Certificate Principal Balance") on any
Distribution Date is equal to the aggregate outstanding principal balance of
such class of Offered Certificates on the Closing Date minus the aggregate of
amounts actually distributed as principal to the holders of the class of Offered
Certificates and, in the case of the Subordinate Certificates, minus any
reductions in the Certificate Principal Balance of such Subordinate Certificates
due to Realized Losses as described in this prospectus supplement.
Each class of Offered Certificates represents the right to receive payments
of interest at the Certificate Rate for that class and payments of principal as
described below.
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The person in whose name a Certificate is registered in the Certificate
Register is referred to in this prospectus supplement as a "Certificateholder."
BOOK-ENTRY CERTIFICATES
The Offered Certificates initially will be book-entry certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Offered Certificates ("Certificateowners") will hold the certificates
through The Depository Trust Company ("DTC"), in the United States, or
Clearstream Banking, societe anonyme ("Clearstream, Luxembourg") or the
Euroclear System ("Euroclear"), in Europe, if the Certificateowners are
participants of the systems, or indirectly through organizations that are
participants in the systems. The Book-Entry Certificates will be issued in one
or more certificates per class, representing the aggregate principal balance (or
notional amount) of each class of Offered Certificates, and will initially be
registered in the name of Cede & Co. ("Cede"), the nominee of DTC. Euroclear and
Clearstream, Luxembourg will hold omnibus positions on behalf of their
participants through customers' securities accounts in Euroclear's and
Clearstream, Luxembourg's names on the books of their respective depositaries
which in turn will hold positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank N.A. will act as depositary
for Clearstream, Luxembourg and Morgan Guaranty Trust Company of New York will
act as depositary for Euroclear. Investors may hold beneficial interests in the
Book-Entry Certificates in minimum denominations representing principal balances
(or notional amounts) of $25,000 and in integral multiples of $1,000 in excess
of $25,000. Except as described in the prospectus, no person acquiring a
Book-Entry Certificate will be entitled to receive a physical certificate
representing the Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede, as nominee of DTC.
Certificateowners will not be Certificateholders as that term is used in the
Agreement. Certificateowners are permitted to exercise their rights only
indirectly through DTC and its participants (including Euroclear and
Clearstream, Luxembourg).
We refer you to "DESCRIPTION OF THE SECURITIES--Book Entry Securities" in
the prospectus for more detail.
DISTRIBUTION DATES
On the 25(th) day of each month, or if the 25(th) day is not a Business
Day, then the next succeeding Business Day (each, a "Distribution Date"), the
Trustee will distribute amounts then on deposit in the certificate account
established and maintained by the Trustee in accordance with the Agreement (the
"Certificate Account"). Distributions will be made in immediately available
funds to Certificateholders of Offered Certificates by wire transfer or
otherwise, to the account of the Certificateholder at a domestic bank or other
entity having appropriate facilities therefor, if the Certificateholder has so
notified the Trustee at least five Business Days prior to the Record Date, or by
check mailed to the address of the person entitled to the distributions as it
appears on the register (the "Certificate Register") maintained by the Trustee
as registrar (the "Certificate Registrar"). Certificateholders may experience
some delay in the receipt of their payments due to the operations of DTC.
We refer you to "--Book-Entry Certificates" above for more detail.
The Agreement will provide that a Certificateholder, upon receiving the
final distribution on a Certificate, will be required to send the Certificate to
the Trustee. The Agreement additionally will provide that, in any event, any
Certificate as to which the final distribution on that Certificate has been made
shall be deemed canceled for all purposes of the Agreement.
S-75
GLOSSARY
The "Basic Principal Amount" with respect to the related Home Equity Loan
Group and each Distribution Date shall be the sum of (without duplication):
(A) the principal portion of all scheduled monthly payments on the Home
Equity Loans related to the Home Equity Loan Group actually
received by the Servicer during the related Remittance Period and
any prepayments on the Home Equity Loans made by the mortgagors of
Home Equity Loans in the related Home Equity Loan Group and
actually received by the Servicer during the related Remittance
Period, in each case to the extent the amounts are received by the
Trustee on or prior to the Monthly Remittance Date;
(B) the outstanding principal balance of each Home Equity Loan in the
related Home Equity Loan Group that was purchased by CHEC or
purchased by the Servicer, on or prior to the related Monthly
Remittance Date, in each case to the extent the amounts are
received by the Trustee on or prior to the Monthly Remittance Date;
(C) any Substitution Amounts (as defined in the prospectus) relating to
principal, delivered by CHEC on the related Monthly Remittance Date
in connection with a substitution of a Home Equity Loan in the
related Home Equity Loan Group, in each case to the extent the
amounts are received by the Trustee on or prior to the Monthly
Remittance Date;
(D) all Net Liquidation Proceeds (as defined in the prospectus)
actually collected by or on behalf of the Servicer with respect to
the Home Equity Loans in the related Home Equity Loan Group during
the related Remittance Period (to the extent the Net Liquidation
Proceeds relate to principal), in each case to the extent the
amounts are received by the Trustee on or prior to the Monthly
Remittance Date; and
(E) the principal portion of the proceeds received by the Trustee with
respect to the related Home Equity Loan Group upon termination of
the Trust.
"Business Day" means any day other than (1) a Saturday or Sunday or (2) a
day on which banking institutions in New York, New York, Dallas, Texas or the
city in which the corporate trust office of the Trustee is located are
authorized or obligated by law or executive order to be closed.
The "Class AF-6 Calculation Percentage" for any Distribution Date will be
the fraction, expressed as a percentage, the numerator of which is the
Certificate Principal Balance of the Class AF-6 Certificates and the denominator
of which is the total of the Certificate Principal Balances of all of the Group
I Senior Certificates, in each case before giving effect to distributions of
principal on that Distribution Date.
The "Class AF-6 Lockout Distribution Amount" for any Distribution Date will
be an amount equal to the product of (1) the applicable Class AF-6 Lockout
Percentage for the Distribution Date, (2) the Class AF-6 Calculation Percentage
and (3) the Senior Principal Distribution Amount with respect to Group I for the
Distribution Date. In no event shall the Class AF-6 Lockout Distribution Amount
exceed the outstanding Certificate Principal Balance of the Class AF-6
Certificates or the Senior Principal Distribution Amount with respect to Group I
for the Distribution Date.
The "Class AF-6 Lockout Percentage" for each Distribution Date will be as
follows:
<Table>
<Caption>
DISTRIBUTION DATE LOCKOUT PERCENTAGE
- ----------------- ------------------
April 2002 through March 2005............................... 0%
April 2005 through March 2007............................... 45%
April 2007 through March 2008............................... 80%
April 2008 through March 2009............................... 100%
April 2009 and thereafter................................... 300%
</Table>
S-76
"Class B Principal Distribution Amount" for any Group means, with respect
to any Distribution Date on or after the related Stepdown Date and as long as
the applicable Trigger Event is not in effect, the excess of:
(1) the sum of:
(A) the aggregate Certificate Principal Balances of the related Senior
Certificates, after taking into account distribution of the related
Senior Principal Distribution Amount for the applicable
Distribution Date,
(B) the Certificate Principal Balance of the related Class M-1
Certificates, after taking into account distribution of the related
Class M-1 Principal Distribution Amount for the applicable
Distribution Date,
(C) the Certificate Principal Balance of the related Class M-2
Certificates, after taking into account distribution of the related
Class M-2 Principal Distribution Amount for the applicable
Distribution Date, and
(D) the Certificate Principal Balance of the related Class B
Certificates immediately prior to the applicable Distribution Date,
over (2) the lesser of:
(A) (x) in the case of the Group I Home Equity Loans, 96.50% and (y) in
the case of the Group II Home Equity Loans, 96.00% of the aggregate
Loan Balance of the Home Equity Loans of the related Group as of
the last day of the related Remittance Period, and
(B) the aggregate Loan Balance of the Home Equity Loans of the related
Group as of the last day of the related Remittance Period minus the
related OC Floor;
provided, however, that after the Certificate Principal Balances of the related
Senior, Class M-1 and Class M-2 Certificates are reduced to zero, the Class B
Principal Distribution Amount for the applicable Group and Distribution Date
will equal 100% of the Principal Distribution Amount for such Group.
"Class Interest Carryover Shortfall" means, with respect to any class of
Offered Certificates and any Distribution Date, an amount equal to the sum of
(1) the excess of the related Class Monthly Interest Amount with respect to that
class for the preceding Distribution Date and any outstanding Class Interest
Carryover Shortfall with respect to that class from any preceding Distribution
Date, over the amount in respect of interest that is actually distributed to the
Certificateholders of that class on the preceding Distribution Date plus (2) one
month's interest on the excess, to the extent permitted by law, at the
Certificate Rate for that class.
"Class M-1 Principal Distribution Amount" for any Group means, with respect
to any Distribution Date on or after the related Stepdown Date, (x) 100% of the
Principal Distribution Amount for such Group if the Certificate Principal
Balance of each class of related Senior Certificates has been reduced to zero
and the applicable Trigger Event exists, or (y) if the applicable Trigger Event
is not in effect, the excess of:
(1) the sum of:
(A) the aggregate Certificate Principal Balances of the related Senior
Certificates, after taking into account distribution of the related
Senior Principal Distribution Amount for the applicable
Distribution Date, and
(B) the Certificate Principal Balance of the related Class M-1
Certificates immediately prior to the applicable Distribution Date,
S-77
over (2) the lesser of:
(A) (x) in the case of the Group I Home Equity Loans, 80.50% and (y) in
the case of the Group II Home Equity Loans, 75.00% of the aggregate
Loan Balance of the Home Equity Loans of the related Group as of
the last day of the related Remittance Period, and
(B) the aggregate Loan Balance of the Home Equity Loans of the related
Group as of the last day of the related Remittance Period minus the
related OC Floor.
"Class M-2 Principal Distribution Amount" for any Group means, with respect
to any Distribution Date on or after the related Stepdown Date, (x) 100% of the
Principal Distribution Amount for such Group if the Certificate Principal
Balance of each class of related Senior Certificates and the related Class M-1
Certificates has been reduced to zero and the applicable Trigger Event exists,
or (y) if the applicable Trigger Event is not in effect, the excess of:
(1) the sum of:
(A) the aggregate Certificate Principal Balances of the related Senior
Certificates, after taking into account distribution of the related
Senior Principal Distribution Amount for the applicable
Distribution Date,
(B) the Certificate Principal Balance of the related Class M-1
Certificates, after taking into account distribution of the related
Class M-1 Principal Distribution Amount for the applicable
Distribution Date, and
(C) the Certificate Principal Balance of the related Class M-2
Certificates immediately prior to the applicable Distribution Date,
over (2) the lesser of:
(A) (x) in the case of the Group I Home Equity Loans, 90.00% and (y) in
the case of the Group II Home Equity Loans, 86.00% of the aggregate
Loan Balance of the Home Equity Loans of the related Group as of
the last day of the related Remittance Period and
(B) the aggregate Loan Balance of the Home Equity Loans of the related
Group as of the last day of the related Remittance Period minus the
related OC Floor.
"Class Monthly Interest Amount" with respect to each class of Offered
Certificates means, with respect to any Distribution Date, the aggregate amount
of interest accrued for the related Interest Period at the related Certificate
Rate on the Certificate Principal Balance or Notional Amount of the related
Offered Certificates; provided, however, that the Group I Certificates (other
than the Group I A-IO component) are each subject to the Group I Net WAC Cap and
the Group II Certificates (other than the Group II A-IO component) are each
subject to the Group II Net WAC Cap. For a description of the respective
Certificate Rates, the Group I Net WAC Cap and the Group II Net WAC Cap, see
"--Certificate Rate" below.
"Class Principal Carryover Shortfall" means, with respect to any class of
Subordinate Certificates and any Distribution Date, the excess, if any, of (1)
the sum of (x) the amount of the reduction in the Certificate Principal Balance
of that class of Subordinate Certificates on the applicable Distribution Date as
provided under "--Allocation of Realized Losses" below and (y) the amount of any
such reductions on prior Distribution Dates over (2) the amount distributed in
respect of the related Class Principal Carryover Shortfall to such class on
prior Distribution Dates.
"Cumulative Loss Event" means, as to any Distribution Date and Group, the
occurrence of either a Group I Cumulative Loss Trigger Event or Group II
Cumulative Loss Trigger Event, as applicable.
"Delinquency Amount" means, with respect to any Group and Remittance
Period, the sum, without duplication, of the aggregate principal balance of the
Home Equity Loans of such Group that are (1) 60
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or more days delinquent, (2) 60 or more days delinquent and in bankruptcy, (3)
in foreclosure and (4) REO properties, each as of the last day of such
Remittance Period.
A 'Delinquency Event" for a Group shall have occurred and be continuing if,
at any time, the 60+ Delinquency Percentage (Rolling Three Month) for Group I
exceeds 50% of the Senior Enhancement Percentage for Group I or the 60+
Delinquency Percentage (Rolling Three Month) for Group II exceeds 40% of the
Senior Enhancement Percentage for Group II, as applicable.
"Excess Interest" means, with respect to any Group and Distribution Date,
the sum of (A) the interest amounts remaining for the Group, if any, after the
application of payments pursuant to clauses first through fifth under
"--Distributions of Interest" below and (B) any Excess Overcollateralization
Amount for the related Group (after taking into account the payment of the
related Principal Distribution Amount for such Group on such Distribution Date).
"Excess Overcollateralization Amount" means, with respect to any Group and
Distribution Date, the lesser of (1) the Basic Principal Amount for such Group
and Distribution Date and (2) the excess, if any, of (x) the
Overcollateralization Amount for such Group, assuming 100% of the related Basic
Principal Amount is distributed on the Offered Certificates of the related
Group, over (y) the Required Overcollateralization Amount for that Group.
"Group I Cumulative Loss Trigger Event" shall have occurred with respect to
any Distribution Date and the Group I Home Equity Loans, if the fraction,
expressed as a percentage, obtained by dividing (x) the aggregate amount of
cumulative Realized Losses incurred on the Group I Home Equity Loans from the
Cut-Off Date through the last day of the related Remittance Period by (y) the
aggregate Loan Balance of the Group I Home Equity Loans as of the Cut-Off Date,
exceeds the applicable percentages described below with respect to such
Distribution Date:
<Table>
<Caption>
DISTRIBUTION DATE LOSS PERCENTAGE
- ----------------- ---------------
April 25, 2005 to March 25, 2006............. 2.50% for the first month, plus an additional
1/12th of 1.00% for each month thereafter
April 25, 2006 to March 25, 2007............. 3.50% for the first month, plus an additional
1/12th of 0.75% for each month thereafter
April 25, 2007 to March 25, 2008............. 4.25% for the first month, plus an additional
1/12th of 0.50% for each month thereafter
April 25, 2008 to March 25, 2009............. 4.75% for the first month, plus an additional
1/12th of 0.50% for each month thereafter
April 25, 2009 and thereafter................ 5.25%
</Table>
"Group II Cumulative Loss Trigger Event" shall have occurred with respect
to any Distribution Date and the Group II Home Equity Loans, if the fraction,
expressed as a percentage, obtained by dividing (x) the aggregate amount of
cumulative Realized Losses incurred on the Group II Home Equity Loans from the
Cut-Off Date through the last day of the related Remittance Period by (y) the
aggregate Loan Balance of the Group II Home Equity Loans as of the Cut-Off Date,
exceeds the applicable percentages described below with respect to such
Distribution Date:
<Table>
<Caption>
DISTRIBUTION DATE LOSS PERCENTAGE
- ----------------- ---------------
April 25, 2005 to March 25, 2006............. 3.50% for the first month, plus an additional
1/12th of 2.00% for each month thereafter
April 25, 2006 to March 25, 2007............. 5.50% for the first month, plus an additional
1/12th of 1.50% for each month thereafter
April 25, 2007 to March 25, 2008............. 7.00% for the first month, plus an additional
1/12th of 0.75% for each month thereafter
April 25, 2008 and thereafter................ 7.75%
</Table>
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The "Loan Balance" of any Home Equity Loan as of any date of determination
is the actual outstanding principal balance thereof on the Cut-Off Date less any
principal payments made on such Home Equity Loan through such date of
determination. The Agreement provides that the Loan Balance of any Home Equity
Loan which becomes a Liquidated Loan shall thereafter equal zero.
"Monthly Remittance Date" means the 18(th) day of each month, or if the
18(th) day is not a Business Day, the preceding Business Day. On each Monthly
Remittance Date, the Servicer will be required to transfer funds on deposit in
the Principal and Interest Account (as defined in the prospectus) to the
Certificate Account.
"OC Floor" means with respect to any Group, an amount equal to 0.50% of the
aggregate Loan Balance of the Home Equity Loans of such Group as of the Cut-Off
Date.
"Overcollateralization Amount" means, with respect to any Group and
Distribution Date, the excess, if any, of (1) the aggregate Loan Balance of the
Home Equity Loans of such Group as of the close of business on the last day of
the preceding Remittance Period over (2) the aggregate Certificate Principal
Balance of the Offered Certificates of the related Group as of the Distribution
Date (after taking into account the payment of the related Principal
Distribution Amount for such Group on the Distribution Date).
"Principal Distribution Amount" means, with respect to any Group and
Distribution Date, the lesser of (1) the aggregate Certificate Principal Balance
of the Offered Certificates of the related Group immediately preceding that
Distribution Date and (2) the sum of (x) the Basic Principal Amount for that
Group and Distribution Date minus the Excess Overcollateralization Amount for
that Group and Distribution Date and (y) the Subordination Increase Amount, if
any, for that Group and Distribution Date.
"Record Date" means (1) with respect to any Distribution Date and each
class of Fixed Rate Certificates, the last Business Day of the month immediately
preceding the calendar month in which the Distribution Date occurs and (2) with
respect to any Distribution Date and the Variable Rate Certificates, the
Business Day immediately preceding the Distribution Date, or if Definitive
Certificates have been issued, the last Business Day of the month immediately
preceding the calendar month in which the Distribution Date occurs.
"Remittance Period" means, with respect to any Distribution Date, the
calendar month preceding the calendar month in which the Distribution Date
occurs.
"Required Overcollateralization Amount" for any Group means, with respect
to the first five Distribution Dates, zero and as to any subsequent Distribution
Date (1) prior to the related Stepdown Date, the product of (x) 1.75% for Group
I or 2.00% for Group II, respectively, and (y) the aggregate Loan Balance of the
Home Equity Loans of the related Group as of the Cut-Off Date; and (2) on and
after the related Stepdown Date, the greater of (i) the lesser of (x) the
product of 1.75% and the aggregate Loan Balance of the Group I Home Equity Loans
as of the Cut-Off Date or 2.00% and the aggregate Loan Balance of the Group II
Home Equity Loans as of the Cut-Off Date, respectively, and (y) the product of
3.50% for Group I or 4.00% for Group II, respectively, and the aggregate Loan
Balance of the Home Equity Loans of the related Group as of the end of the
related Remittance Period and (ii) the related OC Floor; provided, however, that
on each such subsequent Distribution Date during the continuance of the
applicable Trigger Event the Required Overcollateralization Amount for that
Group will equal the related Required Overcollateralization Amount in effect as
of the Distribution Date immediately preceding the date on which such Trigger
Event first occurred.
"Senior Enhancement Percentage" means, with respect to any Group and
Distribution Date, the percentage equivalent of a fraction, the numerator of
which is the sum of (1) the aggregate Certificate Principal Balances of the
Subordinate Certificates of the related Group and (2) the related
Overcollateralization Amount, in each case, after taking into account the
distribution of the Principal Distribution Amount for that Group on the
applicable Distribution Date, and the denominator of which is
S-80
the aggregate Loan Balance of the Home Equity Loans for that Group as of the
last day of the related Remittance Period.
"Senior Principal Distribution Amount" for any Group means, with respect to
(a) any Distribution Date prior to the related Stepdown Date or during the
continuation of the applicable Trigger Event, the lesser of (1) 100% of the
Principal Distribution Amount for that Group and (2) the aggregate Certificate
Principal Balances of the related Senior Certificates immediately prior to the
Distribution Date, and (b) any other Distribution Date, the lesser of (1) the
Principal Distribution Amount for that Group and (2) the excess, if any, of (x)
the aggregate Certificate Principal Balances of the related Senior Certificates
immediately prior to the applicable Distribution Date over (y) the lesser of
(A)(i) in the case of the Group I Home Equity Loans, 69.50% and (ii) in the case
of the Group II Home Equity Loans, 60.00% of the aggregate Loan Balance of the
Home Equity Loans of the related Group as of the last day of the related
Remittance Period and (B) the aggregate Loan Balance of the Home Equity Loans of
the related Group as of the last day of the related Remittance Period minus the
related OC Floor.
"60+ Delinquency Percentage (Rolling Three Month)" means, with respect to
any Group and Distribution Date, the average of the percentage equivalents of
the fractions determined for each of the three immediately preceding Remittance
Periods, the numerator of each of which is equal to the Delinquency Amount for
such Group and Remittance Period, and the denominator of each of which is the
aggregate Loan Balance of all of the Home Equity Loans of the related Group as
of the end of such Remittance Period.
"Stepdown Date" for a Group means, the later to occur of (1) the earlier to
occur of (A) the Distribution Date in April 2005 and (B) the Distribution Date
on which the aggregate Certificate Principal Balance of the Senior Certificates
of that Group is reduced to zero, and (2) the first Distribution Date on which
the Senior Enhancement Percentage of such Group, after giving effect to the
distribution of the Principal Distribution Amount of such Group on that
Distribution Date, is at least equal to (x) in the case of Group I, 30.50% and
(y) in the case of Group II, 40.00%.
"Subordination Deficiency" means, with respect to any Group and
Distribution Date, the excess, if any, of (1) the Required Overcollateralization
Amount for that Group and Distribution Date over (2) the Overcollateralization
Amount for that Group and Distribution Date after giving effect to the
distribution of the related Basic Principal Amount on that Distribution Date.
"Subordination Increase Amount" for a Group means, with respect to the
first five Distribution Dates, zero, and as to any subsequent Distribution Date,
the lesser of (1) the Subordination Deficiency for that Group and (2) the Excess
Interest for that Group.
"Transition Expenses" for a Group means expenses incurred by the Trustee
with respect to such Group in connection with the transfer of servicing upon the
termination of the Servicer; provided that the amount shall not exceed $50,000
for both Groups in the aggregate in any one calendar year (and no more than
$100,000 for both Groups in the aggregate).
"Trigger Event" for a Group means the existence of a Delinquency Event or a
Cumulative Loss Event with respect to that Group.
DISTRIBUTIONS
The Trustee will be required to deposit into the Certificate Account:
- the proceeds of any liquidation of the assets of the Trust,
- all collections on the Home Equity Loans received during the related
Remittance Period and remitted by the Servicer to the Trustee, and
- all other remittances made to the Trustee by or on behalf of the Sellers
or the Servicer.
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The Agreement establishes a certificate rate on each class of Offered
Certificates (each, a "Certificate Rate") as set forth in this prospectus
supplement under "--Certificate Rate." The Agreement also establishes a
Servicing Fee and a Trustee Fee for each Distribution Date.
On each Distribution Date, the Trustee will make the following
disbursements and transfers from monies then on deposit in the Certificate
Account with respect to the Home Equity Loans of the related Group and apply the
amounts in the following order of priority, in each case, to the extent of funds
remaining:
Distributions of Interest. All interest collections with respect to each
Group are required to be distributed in the following order of priority until
such amounts have been fully distributed:
- first, to the Trustee, the Trustee Fee and any Transition Expenses for
the related Group;
- second, to each class of the Senior Certificates and the related Group
A-IO component for such Group, the Class Monthly Interest Amount and any
Class Interest Carryover Shortfall for such class or component on that
Distribution Date; provided, however, if the interest collections for the
related Group are not sufficient to make a full distribution of the Class
Monthly Interest Amount and any Class Interest Carryover Shortfall with
respect to the Senior Certificates and the related Group A-IO component
of such Group, the interest collections for the related Group will be
distributed pro rata among each such class of Senior Certificates and the
related Group A-IO component of the related Group based on the ratio of:
- the Class Monthly Interest Amount and Class Interest Carryover
Shortfall for that class or component to
- the total amount of Class Monthly Interest Amount and any Class
Interest Carryover Shortfall for the Senior Certificates and related
Group A-IO component of the Group;
- third, to the Class M-1 Certificates of the Group, the Class Monthly
Interest Amount for that class and Distribution Date;
- fourth, to the Class M-2 Certificates of the Group, the Class Monthly
Interest Amount for that class and Distribution Date;
- fifth, to the Class B Certificates of the Group, the Class Monthly
Interest Amount for that class and Distribution Date; and
- sixth, any remainder will be treated as Excess Interest of such Group and
distributed as described below under the subheading "--Distributions of
Excess Interest."
Distributions of Principal. The Principal Distribution Amount for that
Distribution Date with respect to each Group is required to be distributed in
the following order of priority until the related Principal Distribution Amount
has been fully distributed:
- first, to the Senior Certificates (other than the related Group A-IO
component) of the related Group, the Senior Principal Distribution Amount
for the Group, as follows:
(i) the Senior Principal Distribution Amount for Group I is required to
be distributed as follows:
- first, the Class AF-6 Lockout Distribution Amount to the Class
AF-6 Certificates, and
- then, the balance of the Senior Principal Distribution Amount
for Group I, sequentially, to the Class AF-1, Class AF-2, Class
AF-3, Class AF-4, Class AF-5 and Class AF-6 Certificates so that
no distribution will be made to any such class until the
Certificate Principal Balances of all the related Senior
Certificates with a lower numeral designation shall have been
reduced to zero;
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provided, however, that, on any Distribution Date on which the
Certificate Principal Balance of the Senior Certificates with respect to
Group I is equal to or greater than the aggregate Loan Balance of the
Group I Home Equity Loans, the Senior Principal Distribution Amount for
Group I will be distributed pro rata and not sequentially to those
Senior Certificates; and
(ii) the Senior Principal Distribution Amount for Group II is required
to be distributed to the Class AV Certificates until the
Certificate Principal Balance of that class has been reduced to
zero;
- second, to the Class M-1 Certificates of the Group, the Class M-1
Principal Distribution Amount for that class;
- third, to the Class M-2 Certificates of the Group, the Class M-2
Principal Distribution Amount for that class; and
- fourth, to the Class B Certificates of the Group, the Class B Principal
Distribution Amount for that class.
Distributions of Excess Interest. Interest collections with respect to
each Group not otherwise required to be distributed as described under
"--Distributions of Interest" above together with any Excess
Overcollateralization Amount for the related Group, will be treated as Excess
Interest and will be required to be distributed in the following order of
priority until fully distributed:
- first, the Subordination Increase Amount for the Group (other than the
related Group A-IO component), payable in the order of priority set forth
under "--Distributions of Principal" above;
- second, to the Class M-1 Certificates of the Group, the Class Interest
Carryover Shortfall for that class;
- third, to the Class M-1 Certificates of the Group, the Class Principal
Carryover Shortfall for that class;
- fourth, to the Class M-2 Certificates of the Group, the Class Interest
Carryover Shortfall for that class;
- fifth, to the Class M-2 Certificates of the Group, the Class Principal
Carryover Shortfall for that class;
- sixth, to the Class B Certificates of the Group, the Class Interest
Carryover Shortfall for that class;
- seventh, to the Class B Certificates of the Group, the Class Principal
Carryover Shortfall for that class;
- eighth, for distribution to the other Group first, to the Offered
Certificates of the other Group in accordance with the priorities set
forth under "--Distributions of Principal" above, to the extent that any
Subordination Increase Amounts with respect to such Certificates have not
otherwise been distributed in full for that Distribution Date and then,
to the Offered Certificates of the other Group in accordance with the
priorities set forth above, to the extent that any related Class
Principal Carryover Shortfalls listed above have not otherwise been
distributed in full for that Distribution Date;
- ninth, to the Supplemental Interest Reserve Fund, the amounts required
for such Group under the Agreement for distribution in accordance with
the next succeeding priority;
- tenth, in the case of Group I, to the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5, Class AF-6, Class MF-1, Class MF-2 and Class BF
Certificates, in the order of priority set forth under "--Distributions
of Interest" above, the related Group I Net WAC Cap Carryover from and to
the extent of funds on deposit in the Supplemental Interest Reserve Fund
with respect to Group I and, in the case of Group II, to the Class AV,
Class MV-1, Class MV-2 and Class BV
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Certificates, in the order of priority set forth under "--Distributions
of Interest" above, the related Group II Net WAC Cap Carryover from and
to the extent of funds on deposit in the Supplemental Interest Reserve
Fund with respect to Group II;
- eleventh, to the Trustee as reimbursement for all reimbursable expenses
with respect to the related Group incurred in connection with its duties
and obligations under the Agreement to the extent not paid as Trustee
Fees or Transition Expenses pursuant to the first priority under
"--Distributions of Interest" above, payable first from the related Group
and then from the other Group; and
- twelfth, to the Servicer to the extent of any unreimbursed Delinquency
Advances (as defined in the prospectus), unreimbursed Servicing Advances
(as defined in the prospectus) and unreimbursed Compensating Interest (as
defined in the prospectus) each with respect to the related Group,
payable first from the related Group and then from the other Group; and
- thirteenth, to the Non-Offered Certificates, the remainder.
CERTIFICATE RATE
With respect to any Distribution Date and the Class AF-1 Certificates, the
"Certificate Rate" will equal the lesser of (A) 3.580% per annum and (B) the
Group I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class AF-2 Certificates, the
"Certificate Rate" will equal the lesser of (A) 4.487% per annum and (B) the
Group I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class AF-3 Certificates, the
"Certificate Rate" will equal the lesser of (A) 5.122% per annum and (B) the
Group I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class AF-4 Certificates, the
"Certificate Rate" will equal the lesser of (A) 5.896% per annum (or 6.396% per
annum for each Interest Period occurring after the date on which an affiliate of
the Servicer first fails to exercise its clean-up call option) and (B) the Group
I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class AF-5 Certificates, the
"Certificate Rate" will equal the lesser of (A) 6.334% per annum (or 6.834% per
annum for each Interest Period occurring after the date on which an affiliate of
the Servicer first fails to exercise its clean-up call option) and (B) the Group
I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class AF-6 Certificates, the
"Certificate Rate" will equal the lesser of (A) 5.910% per annum and (B) the
Group I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class MF-1 Certificates, the
"Certificate Rate" will equal the lesser of (A) 6.418% per annum and (B) the
Group I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class MF-2 Certificates, the
"Certificate Rate" will equal the lesser of (A) 6.894% per annum and (B) the
Group I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class BF Certificates, the
"Certificate Rate" will equal the lesser of (A) 7.112% per annum and (B) the
Group I Net WAC Cap for the Distribution Date.
With respect to any Distribution Date and the Class AV Certificates, the
"Certificate Rate" will equal the lesser of (A) the sum of (1) One-Month LIBOR
and (2) 0.26% per annum and (B) the Group II Net WAC Cap for such Distribution
Date.
With respect to any Distribution Date and the Class MV-1 Certificates, the
"Certificate Rate" will equal the lesser of (A) the sum of (1) One-Month LIBOR
and (2) 0.66% per annum and (B) the Group II Net WAC Cap for such Distribution
Date.
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With respect to any Distribution Date and the Class MV-2 Certificates, the
"Certificate Rate" will equal the lesser of (A) the sum of (1) One-Month LIBOR
and (2) 1.15% per annum and (B) the Group II Net WAC Cap for such Distribution
Date.
With respect to any Distribution Date and the Class BV Certificates, the
"Certificate Rate" will equal the lesser of (A) the sum of (1) One-Month LIBOR
and (2) 1.87% per annum and (B) the Group II Net WAC Cap for such Distribution
Date.
The Class A-IO Certificates which are comprised of the Group I A-IO
component and the Group II A-IO component do not have a Certificate Principal
Balance but will accrue interest at a rate of 6.00% per annum for 20 months on
the Notional Amount. The Class A-IO Certificates will not be entitled to any
distributions after the 20th Distribution Date (except for any Class Interest
Carryover Shortfalls).
The "Group I Net WAC Cap" with respect to any Distribution Date, other than
the first Distribution Date, will be a rate per annum equal to the weighted
average of the Net Coupon Rates on the Group I Home Equity Loans as of the
beginning of the related Remittance Period less the product of (a) 6.00% per
annum and (b) a fraction, the numerator of which is the Group I A-IO Notional
Amount for the related Distribution Date and the denominator of which is the
Group I Loan Balance as of the beginning of the related Remittance Period. The
Group I Net WAC Cap is not applicable on the first Distribution Date.
The "Group II Net WAC Cap" (1) with respect to the first Distribution Date
is an amount equal to all interest received on the Group II Home Equity Loans
for the related Remittance Period less the Trustee Fee, Servicing Fee and
interest payable on the Group II A-IO component on such Distribution Date and
(2) with respect to any Distribution Date, other than the first Distribution
Date, will be the rate per annum equal to the product of (i) the weighted
average of the Net Coupon Rates on the Group II Home Equity Loans as of the
beginning of the related Remittance Period less the product of (a) 6.00% per
annum and (b) a fraction, the numerator of which is the Group II A-IO Notional
Amount for the related Distribution Date and the denominator of which is the
Group II Loan Balance as of the beginning of the related Remittance Period and
(ii) a fraction, the numerator of which is 30 and denominator of which is the
number of days in the related Interest Period adjusted as appropriate for
day-counting conventions.
The "Net Coupon Rate" of any Group I Home Equity Loan or Group II Home
Equity Loan will be the rate per annum equal to the coupon rate of the Home
Equity Loan minus the sum of (1) the rate at which the Servicing Fee accrues and
(2) the rate at which the Trustee Fee accrues (expressed as a per annum
percentage of the aggregate principal balance of the Group I or Group II Home
Equity Loans, as applicable).
If on any Distribution Date the Certificate Rate for any of the Group I
Certificates (other than the Group I A-IO component) is based on the Group I Net
WAC Cap, the applicable Group I Certificateholders will be entitled to receive
on subsequent Distribution Dates the related Group I Net WAC Cap Carryover as
described under "--Distributions" above.
If on any Distribution Date the Certificate Rate for any of the Group II
Certificates (other than the Group II A-IO component) is based on the Group II
Net WAC Cap, the applicable Group II Certificateholders will be entitled to
receive on subsequent Distribution Dates the related Group II Net WAC Cap
Carryover as described under "--Distributions" above.
The "Group I Net WAC Cap Carryover" with respect to any Distribution Date
other than the first Distribution Date, is equal to the sum of (A) the excess of
(1) the amount of interest that the related class of Group I Certificates (other
than the Group I A-IO component), as applicable, would otherwise be entitled to
receive on the Distribution Date had its interest rate been calculated at the
respective Certificate Rate for such class and for the Distribution Date without
regard to the Group I Net WAC Cap over (2) the amount of interest payable on
such class at the respective Certificate Rate for such class for the
Distribution Date and (B) the Group I Net WAC Cap Carryover for all previous
Distribution Dates
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not previously paid to the related class of Certificates (including any interest
accrued on that amount at the related Certificate Rate without regard to the
Group I Net WAC Cap).
The "Group II Net WAC Cap Carryover" is equal to the sum of (A) the excess
of (1) the amount of interest the related class of Group II Certificates (other
than the Group II A-IO component) would otherwise be entitled to receive on the
Distribution Date had its interest rate been calculated at the respective
Certificate Rate for such class and for the related Distribution Date without
regard to the Group II Net WAC Cap over (2) the amount of interest payable on
such class at the respective Certificate Rate for such class for the related
Distribution Date and (B) the Group II Net WAC Cap Carryover for all previous
Distribution Dates not previously paid to the related class of Certificates
(including any interest accrued on that amount at the related Certificate Rate
without regard to the Group II Net WAC Cap).
The ratings on the Offered Certificates by Standard & Poor's Ratings
Service, a division of the McGraw-Hill Companies, Inc. ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), and Fitch Ratings ("Fitch" and together
with S&P and Moody's, the "Rating Agencies") will not address the likelihood of
receipt by such Certificateholders of any amounts in respect of Group I Net WAC
Cap Carryover or Group II Net WAC Cap Carryover, respectively. Payment of the
Group I Net WAC Cap Carryover or Group II Net WAC Cap Carryover will be subject
to availability of funds therefor in accordance with the priority of payments
set forth under "--Distributions" above.
"Interest Period" means, with respect to each Distribution Date and the
Fixed Rate Certificates, the period from the first day of the calendar month
preceding the month of the Distribution Date through the last day of the
calendar month and, with respect to each Distribution Date and the Variable Rate
Certificates, the period from and including the preceding Distribution Date (or
the Closing Date in the case of the first Distribution Date) to and including
the day preceding the related Distribution Date.
Interest on the Fixed Rate Certificates in respect of any Distribution Date
will accrue during the related Interest Period on the basis of a 360-day year
consisting of twelve 30-day months. Interest on the Variable Rate Certificates
in respect of any Distribution Date will accrue during the related Interest
Period on the basis of the actual number of days elapsed in the related Interest
Period and a year of 360 days.
CALCULATION OF ONE-MONTH LIBOR
On each LIBOR Determination Date, the Trustee will determine One-Month
LIBOR for the next Interest Period for the Variable Rate Certificates.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
on Telerate Page 3750 as of 11:00 a.m., London time, on this date. If the rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which one-month deposits in United States dollars
are offered by the Reference Banks at approximately 11:00 a.m. (London time), on
that day to prime banks in the London interbank market. The Trustee will request
the principal London office of each of the Reference Banks to provide a
quotation of its rate. If at least two quotations are provided, the rate for
that day will be the arithmetic mean of the quotations (rounded upwards if
necessary to the nearest whole multiple of 1/16%). If fewer than two quotations
are provided as requested, the rate for that day will be the arithmetic mean of
the rates quoted by major banks in New York City, selected by the Servicer, at
approximately 11:00 a.m. (New York City time) on that day for one-month loans in
United States dollars to leading European banks.
"LIBOR Determination Date" means, with respect to any Interest Period, the
second London Business Day preceding the commencement of the Interest Period.
For purposes of determining One-Month LIBOR, a "London Business Day" is any day
on which dealings in deposits of United States dollars are transacted in the
London interbank market.
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"Telerate Page 3750" means the display page currently so designated on the
Bridge Telerate Service (or another page that replaces this page on the service
for the purpose of displaying comparable rates or prices) and "Reference Banks"
means leading banks selected by CHEC and engaged in transactions in Eurodollar
deposits in the international Eurocurrency market.
CREDIT ENHANCEMENT
Overcollateralization Resulting from Cash Flow Structure. The Agreement
provides that Excess Interest of a Group will be used in the following order of
priority:
(1) to pay the Offered Certificates (other than the related Group A-IO
component) of the related Group any Subordination Increase Amount for
such Group,
(2) to pay any related Class Interest Carryover Shortfall and any related
Class Principal Carryover Shortfall on the Subordinate Certificates of
the related Group,
(3) first, to the Offered Certificates (other than the related Group A-IO
component) of the other Group, to the extent that any Subordination
Increase Amounts with respect to such Certificates have not otherwise
been distributed on a Distribution Date and then, to the Subordinate
Certificates of the other Group, to the extent of any related Class
Principal Carryover Shortfalls remaining following the distributions
payable from such other Group on such Distribution Date;
(4) to pay the applicable Certificateholders of the related Group any Group
I Net WAC Cap Carryover or Group II Net WAC Cap Carryover, as
applicable,
(5) to reimburse the Trustee and then the Servicer with respect to any
amounts owing to them with respect to the related Group and then the
other Group, and
(6) to pay the Class X-IO and the Class R Certificateholders, as specified
in the Agreement.
The Agreement requires that, on each Distribution Date, Excess Interest of
a Group and any Excess Interest of the other Group available on a subordinated
basis following required distributions on the other Group be applied as an
accelerated payment of principal on the Offered Certificates (other than the
related Group A-IO component) of the related Group, but only to the limited
extent described above. The application of Excess Interest for the payment of
principal has the effect of accelerating the amortization of the Offered
Certificates (other than the related Group A-IO component) of the related Group
relative to the amortization of the related Home Equity Loans.
Pursuant to the Agreement, the Excess Interest will be applied beginning on
the sixth Distribution Date as an accelerated payment of principal on the
Offered Certificates (other than the related Group A-IO component) of the
related Group until the related Overcollateralization Amount has increased to
the Required Overcollateralization Amount for that Group.
If, on any Distribution Date, the Overcollateralization Amount for a Group
is, or, after taking into account all other distributions to be made on the
Distribution Date, would be, greater than the Required Overcollateralization
Amount for that Group, then any amounts relating to principal which would
otherwise be distributed to the Certificateholders of the related Offered
Certificates on the Distribution Date shall instead be distributed as Excess
Interest as provided in the Agreement in an amount equal to the Excess
Overcollateralization Amount for such Group.
Allocation of Realized Losses. The Agreement provides generally that on
any Distribution Date all amounts collected on account of principal (other than
any amount attributed to the Excess Overcollateralization Amount for a Group)
during the prior Remittance Period will be distributed to the Certificateholders
of the related Offered Certificates (other than the related Group A-IO
component) on the Distribution Date. If any Home Equity Loan became a Liquidated
Loan during the prior Remittance Period, the Net Liquidation Proceeds related to
that Home Equity Loan and allocated to principal may be less than the principal
balance of the related Home Equity Loan. The amount of any insufficiency is
S-87
referred to as a "Realized Loss." The Agreement provides that the Loan Balance
of any Home Equity Loan which becomes a Liquidated Loan shall thereafter equal
zero.
A "Liquidated Loan" is a Home Equity Loan with respect to which a
determination has been made by the Servicer that all recoveries have been made
or that the Servicer reasonably believes that the cost of obtaining any
additional recoveries from that loan would exceed the amount of the recoveries.
The Basic Principal Amount of a Home Equity Loan Group includes the Net
Liquidation Proceeds in respect of principal received upon liquidation of a
Liquidated Loan of such Home Equity Loan Group. If such Net Liquidation Proceeds
are less than the unpaid principal balance of the related Liquidated Loan, the
aggregate Loan Balance of the Home Equity Loans in a Home Equity Loan Group will
decline more than the aggregate Certificate Principal Balance of the related
Offered Certificates. If the difference is not covered by the related
Overcollateralization Amount or the application of Excess Interest for that
Group or, to the extent available, for the other Group, the class of Subordinate
Certificates of such Group then outstanding with the lowest relative payment
priority will bear the loss.
If, following the distributions on a Distribution Date, the aggregate
Certificate Principal Balance of the Offered Certificates of a Group exceeds the
aggregate Loan Balance of the Home Equity Loans in the related Home Equity Loan
Group, that is, the related Offered Certificates are undercollateralized, the
Certificate Principal Balance of the class of Subordinate Certificates of such
Group then outstanding with the lowest relative payment priority will be reduced
by the amount of the excess. Any reduction will constitute a Class Principal
Carryover Shortfall for the applicable class. Although a Class Principal
Carryover Shortfall will not accrue interest, this amount may be paid on a
future distribution date to the extent funds are available for distribution as
provided above under "--Distributions."
The Agreement does not permit the allocation of Realized Losses to the
Senior Certificates. Investors in the Senior Certificates should note that
although Realized Losses cannot be allocated to the Senior Certificates, under
certain loss scenarios there will not be enough principal and interest paid on
the Home Equity Loans of a Home Equity Loan Group to pay the Senior Certificates
(other than the Class A-IO Certificates) all interest and principal amounts to
which they are then entitled and under certain loss scenarios there will not be
enough interest paid on the Home Equity Loans of a Home Equity Loan Group to pay
the Class A-IO Certificates all interest amounts to which they are then
entitled.
For all purposes of this prospectus supplement, the Class B Certificates of
a Group will have the lowest payment priority of any class of Offered
Certificates for such Group.
Crosscollateralization Provisions. Certain Excess Interest amounts with
respect to a Home Equity Loan Group on a Distribution Date will be available on
a subordinated basis after required distributions on such Group on such
Distribution Date to cover Subordination Increase Amounts remaining unpaid with
respect to the Offered Certificates (other than the related Group A-IO
component) of the other Group and Class Principal Carryover Shortfalls remaining
unpaid with respect to the Subordinate Certificates of the other Group, each as
described above under "--Distributions."
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled Distribution Date (the "Final Scheduled Distribution
Date") for each class of Offered Certificates is specified on the cover page of
this prospectus supplement.
The Final Scheduled Distribution Date for each of the Class AF-1, Class
AF-2, Class AF-3 and Class AF-4 Certificates is the Distribution Date on which
the Certificate Principal Balance for the related class would be reduced to zero
assuming that no prepayments are received on the related Home Equity Loans and
scheduled monthly payments of principal of and interest on each of the related
Home Equity Loans are timely received. The Final Scheduled Distribution Date for
each of the Class AF-5, Class AF-6, Class AV and each class of Subordinate
Certificates is the Distribution Date occurring one month after the maturity
date of the latest possible maturing Home Equity Loan of the related Home Equity
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Loan Group. The Final Scheduled Distribution Date for the Class A-IO
Certificates is the 20(th) Distribution Date.
It is expected that the actual last Distribution Date for each class of
Offered Certificates (other than the Class A-IO Certificates) will occur
significantly earlier than the Final Scheduled Distribution Date.
OPTIONAL TERMINATION BY AN AFFILIATE OF THE SERVICER;
AUCTION SALE; ADDITIONAL PRINCIPAL DISTRIBUTIONS
An affiliate of the Servicer may, at its option, terminate the Trust by
purchasing all of the Home Equity Loans on any Distribution Date on or after the
date on which the aggregate outstanding principal balance of the Group I and
Group II Home Equity Loans is equal to or less than 20% of the aggregate
outstanding principal balance of the Home Equity Loans in both Groups on the
Cut-Off Date.
If the affiliate of the Servicer does not exercise this clean-up call
option when it first could have been exercised, then on the next Distribution
Date after such date, the Trustee will begin an auction process at the written
direction and expense of the Servicer to sell the Home Equity Loans in both
Groups and the other Trust assets. It is a condition to the sale of the Trust
assets that the proceeds of the auction are at least sufficient to pay the
aggregate unpaid principal balance of the Offered Certificates (other than any
Class Principal Carryover Shortfalls), all accrued and unpaid interest thereon
(other than any Group I Net WAC Cap Carryover and any Group II Net WAC Cap
Carryover), any unreimbursed Delinquency Advances, Servicing Advances and
Compensating Interest and any Delinquency Advances the Servicer has failed to
remit (the "Minimum Bid"). If the first auction of the Trust property is not
successful because the highest bid received is less than the Minimum Bid, then
the Trustee will conduct an auction of the Home Equity Loans every third month
thereafter, unless and until the Minimum Bid is received for the Trust property.
Affiliates of the Servicer other than the Sellers and the Depositor may bid in
the auction.
If the clean-up call option is not exercised on the date upon which it
first could have been exercised, then on the third Distribution Date following
such date and on each Distribution Date thereafter, the amounts that otherwise
would have been payable to the Non-Offered Certificates from collections on a
Group will be paid to the Offered Certificates of the related Group (other than
the related Group A-IO component) as a principal distribution amount. The
additional principal distribution amount for the related Offered Certificates
will be applied in the same order of priority as distributions of the Principal
Distribution Amount to the related classes of Certificates.
SERVICING OF DELINQUENT HOME EQUITY LOANS
The Servicer will exercise its discretion, consistent with customary
servicing procedures and the terms of the Agreement, with respect to the
enforcement and servicing of defaulted Home Equity Loans in such manner as will
maximize the receipt of principal and interest with respect thereto, including
but not limited to the sale of such Home Equity Loan to a third party, the
modification of such Home Equity Loan, or foreclosure upon the related Mortgaged
Property and disposition thereof.
SERVICING FEE
As to each Home Equity Loan, the Servicer will retain a fee (the "Servicing
Fee") equal to 0.50% per annum, payable monthly at one-twelfth of the annual
rate of the then outstanding principal balance of the Home Equity Loan serviced
as of the first day of each Remittance Period. If a successor Servicer is
appointed in accordance with the Agreement, the Servicing Fee shall be an amount
agreed upon by the Trustee and the successor Servicer but in no event in an
amount greater than the amount paid to the predecessor Servicer. The Servicer
will also be able to retain late fees, prepayment charges, assumption fees,
release fees, bad check charges and any other servicing related charges.
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THE TRUSTEE
JPMorgan Chase Bank has been named Trustee pursuant to the Agreement.
The Trustee may have normal banking relationships with the Depositor, the
Sellers and the Servicer.
As to each Home Equity Loan the Trustee will receive a fee (the "Trustee
Fee") set forth in the Agreement.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Servicer. The
Depositor and the Servicer may also remove the Trustee if the Trustee ceases to
be eligible to continue under the Agreement or if the Trustee becomes insolvent.
Upon becoming aware of these circumstances, the Depositor will be obligated to
appoint a successor Trustee, as approved by the Servicer (which approval shall
not be unreasonably withheld). Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless (1)
Certificateholders holding Certificates evidencing at least 51% of the
percentage interests in the Trust have made written requests upon the Trustee to
institute a proceeding in its own name as Trustee under the Agreement and have
offered to the Trustee reasonable indemnity and (2) the Trustee for 60 days has
neglected or refused to institute any proceeding. The Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the Agreement
or to make any investigation of matters arising under the Agreement or to
institute, conduct or defend any litigation under the Agreement or in relation
to the Agreement at the request, order or direction of any of the
Certificateholders, unless the Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred by the Trustee in compliance with such request or
direction.
The Trustee will make the monthly statement to Certificateholders (and, at
its option, any additional files containing the same information in an
alternative format) available each month to Certificateholders and the other
parties to the Agreement via the Trustee's internet website at
www.jpmorgan.com/absmbs or by calling the Trustee's customer service desk at
877-722-1095. Parties are entitled to have a paper copy mailed to them via first
class mail by calling the customer service desk. The Trustee shall have the
right to change the way monthly statements are distributed in order to make
distribution more convenient and/or more accessible to the above parties and the
Trustee shall provide timely and adequate notification to all above parties
regarding any changes.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Home Equity Loans from the
Sellers.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following section in conjunction with the section in the prospectus
captioned "FEDERAL INCOME TAX CONSEQUENCES" discusses the material federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates. This section must be considered only in connection with
"FEDERAL INCOME TAX CONSEQUENCES" in the prospectus. The discussion in this
prospectus supplement and in the prospectus is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below and in the prospectus does not purport to deal with all federal
tax consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Offered Certificates. No portion
of the "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" or
S-90
"FEDERAL INCOME TAX CONSEQUENCES" sections of the prospectus supplement or
prospectus constitutes an opinion of counsel, other than the opinions set forth
in the second paragraph of "--REMIC Elections" below and in "FEDERAL INCOME TAX
CONSEQUENCES--Opinions" in the prospectus.
REMIC ELECTIONS
Three separate elections will be made to treat the assets of the Trust as
real estate mortgage investment conduits ("REMICs") for federal income tax
purposes, creating a three-tiered REMIC structure. The Offered and Class X-IO
Certificates will be designated as regular interests in a REMIC (the "Regular
Certificates" or the "REMIC Regular Certificates"), and the Class R-1, Class R-2
and Class R-3 Certificates each will be designated as the residual interest in a
REMIC (the "Residual Certificates" or the "REMIC Residual Certificates"). In
addition, as described below, the Offered Certificates, other than the Class
A-IO Certificates, will represent an undivided beneficial ownership interest in
an interest rate cap.
Qualification as a REMIC requires ongoing compliance with relevant
conditions. Stroock & Stroock & Lavan LLP, special tax counsel to the Sellers
and the Depositor, is of the opinion that, for federal income tax purposes,
assuming (1) the appropriate REMIC elections are made, and (2) compliance with
all of the provisions of the Agreement, the REMICs formed pursuant to the
Agreement will each constitute a REMIC, the Offered and Class X-IO Certificates
will represent ownership of "regular interests" in a REMIC, and the Residual
Certificates will be considered the sole class of "residual interests" in each
REMIC.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. Some or
all of the classes of Offered Certificates may be subject to the original issue
discount provisions. We refer you to "FEDERAL INCOME TAX CONSEQUENCES" in the
prospectus for more detail.
In addition, classes of Offered Certificates may be treated as issued with
a premium. We refer you to "FEDERAL INCOME TAX CONSEQUENCES" in the prospectus
for more detail.
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount is 115% Prepayment Assumption with respect to
the Group I Home Equity Loans and 28% CPR with respect to the Group II Home
Equity Loans. See "PREPAYMENT AND YIELD CONSIDERATIONS" in this prospectus
supplement for a description of the prepayment assumption models. However, no
representation is made as to the rate at which prepayments actually will occur.
CARRYOVER CERTIFICATES
The Agreement provides for a reserve fund (the "Supplemental Interest
Reserve Fund"), which is held by the Trustee on behalf of the holders of the
Offered Certificates, other than the Class A-IO Certificates, (the "Carryover
Certificates"). To the extent amounts on deposit are sufficient, holders of the
Carryover Certificates will be entitled to receive payments from the fund equal
to any WAC Excess due to the application of a cap in the priorities described in
"DESCRIPTION OF THE CERTIFICATES--Distributions" in this prospectus supplement.
The "WAC Excess" is the portion of the current or carryover interest and any
accrued interest thereon being distributed on any particular Distribution Date
with respect to the Carryover Certificates equal to the amount of interest
accrued on those Certificates at a rate equal to (a) the excess of the
respective Certificate Rate without regard to the cap over the (b) related
Certificate Rate as a result of the application of the cap. The amount required
to be deposited in the fund on any Distribution Date (the "Supplemental Interest
Reserve Fund Deposit") will equal any WAC Excess as a result of the application
of a cap, or, if there is no WAC Excess as a result of the application of a cap
on that Distribution Date, an amount that, when added to amounts already on
deposit in the
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fund, results in the aggregate amount on deposit in the fund being equal to
$10,000. Any investment earnings on amounts on deposit in the Supplemental
Interest Reserve Fund will be paid to (and will be for the benefit of) the
holders of the Class X-IO Certificates and will not be available to pay any WAC
Excess as a result of the application of a cap. The Supplemental Interest
Reserve Fund will not be included as an asset of any REMIC created pursuant to
the Agreement.
The Regular Certificates, except to the extent of any WAC Excess as a
result of the application of a cap allocable to the Regular Certificates which
are Carryover Certificates, will be treated as regular interests in a REMIC
under section 860G of the Code (the "Regular Interests"). Accordingly, the
portion of the Regular Certificates representing the Regular Interests will be
treated as (i) assets described in section 7701(a)(19)(C) of the Code, and (ii)
"real estate assets" within the meaning of section 856(c)(5)(B) of the Code, in
each case to the extent described in the prospectus. Interest on such portion of
the Regular Certificates will be treated as interest on obligations secured by
mortgages on real property within the meaning of section 856(c)(3)(B) of the
Code to the same extent that the portion of the Regular Certificates is treated
as real estate assets. We refer you to "CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
in the prospectus.
The right to receive any WAC Excess as a result of the application of a cap
will not be (i) a regular interest in a REMIC under section 860G of the Code,
(ii) an asset described in section 7701(a)(19)(C) of the Code, or (iii) a "real
estate asset" within the meaning of section 856(c)(5)(B) of the Code. Further,
the WAC Excess will not be considered interest on obligations secured by
mortgages on real property within the meaning of section 856(c)(3)(B) of the
Code.
Each holder of a Carryover Certificate is deemed to own an undivided
beneficial ownership interest in two assets: (i) a REMIC Regular Interest, and
(ii) an interest rate cap contract (a "Cap Agreement") under which the WAC
Excess as a result of the application of a cap is paid. The Cap Agreement with
respect to the Carryover Certificates is not included in any REMIC. The
treatment of amounts received by a Carryover Certificateholder under the
Certificateholder's right to receive the WAC Excess as a result of the
application of a cap will depend upon the portion of the Certificateholder's
purchase price allocable thereto. Under the REMIC regulations, each Carryover
Certificateholder must allocate its purchase price for the Carryover
Certificates between its undivided interest in the Carryover Regular Interests
and its undivided interest in the Cap Agreement in accordance with the relative
fair market values of each property right. No representation is or will be made
as to the relative fair market values. Generally, payments made to the Carryover
Certificates under the Cap Agreement will be included in income based on, and
the purchase price allocated to the Cap Agreement may be amortized in accordance
with, the regulations relating to notional principal contracts.
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impractical to
predict the income tax consequences to the Certificateholders in all of the
state taxing jurisdictions in which they are subject to tax. Certificateholders
are urged to consult their own tax advisors with respect to state and local
income and franchise taxes.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), should consider the fiduciary standards under
ERISA in the context of the plan's particular circumstances before authorizing
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an investment of a portion of the plan's assets in the Offered Certificates.
Accordingly, pursuant to Section 404 of ERISA, the fiduciary should consider
among other factors:
(1) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries;
(2) whether the investment satisfies the applicable diversification
requirements;
(3) whether the investment is in accordance with the documents and
instruments governing the plan;
(4) whether the investment is prudent, considering the nature of the
investment; and
(5) ERISA's prohibition on improper delegation of control over, or
responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code and any entity whose source of funds for the purchase
of Offered Certificates includes plan assets by reason of a plan or account
investing in the entity (each, a "Plan"), are prohibited from engaging in a
broad range of transactions involving Plan assets and persons having specified
relationships to a Plan. These transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon these persons by Section 4975 of the Code.
An investment in Offered Certificates by a Plan might result in the assets
of the Trust being deemed to constitute Plan assets, which in turn might mean
that aspects of the investment, including the operation of the Trust, might be
prohibited transactions under ERISA and the Code. Neither ERISA nor the Code
defines the term "plan assets." Under Section 2510.3-101 of the United States
Department of Labor regulations (the "Regulation"), a Plan's assets may include
an interest in the underlying assets of an entity (including a trust), if the
Plan acquires an "equity interest" in the entity, unless exceptions apply. The
Depositor believes that the Offered Certificates will give Certificateholders an
equity interest in the Trust for purposes of the Regulation and can give no
assurance that the Offered Certificates will qualify for any of the exceptions
under the Regulation. As a result, the assets of the Trust may be considered the
assets of any Plan which acquires an Offered Certificate.
The U.S. Department of Labor has granted to a predecessor of Banc of
America Securities LLC an administrative exemption (Prohibited Transaction
Exemption ("PTE") 93-31, as amended by PTE 97-34 and as further recently amended
by PTE 2000-58 (the "Exemption") from the prohibited transaction rules of ERISA
which may be applicable to the initial purchase, the holding and the subsequent
resale in the secondary market by Plans of pass-through certificates
representing a beneficial undivided ownership interest in the assets of a trust
that consist of receivables, loans and other obligations such as the Home Equity
Loans that meet the conditions and requirements of the Exemption which may be
applicable to the Offered Certificates if Banc of America Securities LLC or any
of its affiliates is either the sole underwriter or manager or co-manager of the
underwriting syndicate, or a selling or placement agent.
The Exemption does not apply to Plans sponsored by the Sellers, the
Depositor, the Underwriters, the Trustee, the Servicer or any mortgagor with
respect to Home Equity Loans included in the Trust constituting more than 5% of
the aggregate unamortized principal balance of the assets in the Trust or any
affiliate of such parties (the "Restricted Group"). No exemption is provided
from the restrictions of ERISA for the acquisition or holding of Offered
Certificates on behalf of an "Excluded Plan" by any person who is a fiduciary
with respect to the assets of the Excluded Plan. For purposes of the Offered
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. In addition, no Plan's investment in any class of Offered
Certificates may exceed 25% of all of the Certificates of the class outstanding
at the time of the Plan's acquisition and after the Plan's acquisition of the
class of Offered Certificates, no more than 25% of the assets over which the
fiduciary has investment authority may be invested in securities of a trust
containing assets which are sold or serviced by the same entity. Finally, in the
case of initial issuance (but not secondary market transactions), at least 50%
of each class of Offered Certificates, and at least 50% of the aggregate
interest in the Trust, must be acquired by persons independent of the Restricted
Group.
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The Depositor believes that the Exemption will apply to the acquisition,
holding and resale of the Offered Certificates by a Plan and that all conditions
of the Exemption other than those within the control of the investors have been
or will be met.
It is a continuing condition of the Exemption that the rating of the
Certificates be at least BBB- at the time of their acquisition by a Plan,
whether in the initial offering or in the secondary market. Therefore, the
acquisition of a Subordinate Certificate on behalf of a Plan will be deemed a
representation that the purchaser understands that the applicability of the
Exemption is conditioned upon such Subordinate Certificate being rated at least
BBB- at such time, unless the purchaser is an insurance company general account
purchasing the Subordinate Certificate pursuant to Sections I and III of PTE
95-60.
We refer you to "ERISA CONSIDERATIONS" in the prospectus for more detail.
Before purchasing an Offered Certificate, a fiduciary of a Plan should
itself confirm (a) that the Offered Certificates constitute "Securities" for
purposes of the Exemption and (b) that the specific conditions set forth in the
Exemption and the other requirements set forth in the Exemption will be
satisfied.
Any Plan fiduciary considering whether to purchase an Offered Certificate
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to the investment.
LEGAL INVESTMENT CONSIDERATIONS
The Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class AF-5, Class AF-6,
Class MF-1, Class MF-2, Class BF, Class MV-2, Class BV and Class A-IO
Certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984. Accordingly, many
institutions with legal authority to invest in comparably rated securities may
not be legally authorized to invest in the Certificates. The Class AV and Class
MV-1 Certificates will constitute "mortgage related securities." You should
consult your own counsel as to whether and to what extent the Offered
Certificates constitute legal investments for you.
We refer you to "LEGAL INVESTMENT" in the prospectus for more detail.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated March 13, 2002 (the "Underwriting Agreement"), between the
Depositor and Banc of America Securities LLC as representative of the
Underwriters named below (the "Underwriters"), the Depositor has agreed to sell
to the Underwriters and the Underwriters have agreed to purchase from the
Depositor the principal amount of the Offered Certificates set forth opposite
their respective names. The Offered Certificates will be offered by the
Underwriters when, as and if issued and sold by the Depositor to the
Underwriters, subject to the Underwriters' right to reject any subscription, in
whole or in part.
<Table>
<Caption>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
UNDERWRITER CLASS AF-1 CLASS AF-2 CLASS AF-3 CLASS AF-4 CLASS AF-5 CLASS AF-6 CLASS MF-1
- ----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
Banc of America Securities LLC.... $38,360,000 $21,700,000 $17,500,000 $22,260,000 $3,500,000 $11,421,900 $7,296,100
Credit Suisse First Boston
Corporation...................... $ 5,480,000 $ 3,100,000 $ 2,500,000 $ 3,180,000 $ 500,000 $ 1,631,700 $1,042,300
Greenwich Capital Markets,
Inc. ............................ $ 5,480,000 $ 3,100,000 $ 2,500,000 $ 3,180,000 $ 500,000 $ 1,631,700 $1,042,300
Salomon Smith Barney Inc. ........ $ 5,480,000 $ 3,100,000 $ 2,500,000 $ 3,180,000 $ 500,000 $ 1,631,700 $1,042,300
</Table>
<Table>
<Caption>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PERCENTAGE
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF INTEREST OF
UNDERWRITER CLASS MF-2 CLASS BF CLASS AV CLASS MV-1 CLASS MV-2 CLASS BV CLASS A-IO
- ----------- ---------- ---------- ------------ ------------ ---------- ---------- -----------
Banc of America Securities LLC.... $6,300,000 $4,312,000 $134,029,000 $ 12,258,400 $8,990,100 $8,172,500 70%
Credit Suisse First Boston
Corporation...................... $ 900,000 $ 616,000 $ 19,147,000 $ 1,751,200 $1,284,300 $1,167,500 10%
Greenwich Capital Markets,
Inc. ............................ $ 900,000 $ 616,000 $ 19,147,000 $ 1,751,200 $1,284,300 $1,167,500 10%
Salomon Smith Barney Inc. ........ $ 900,000 $ 616,000 $ 19,147,000 $ 1,751,200 $1,284,300 $1,167,500 10%
</Table>
The Underwriters have informed the Depositor that they propose to offer the
Offered Certificates for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriters may effect the transactions by
selling the Offered Certificates to or through dealers, and the dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters. In connection with the sale of the Offered
Certificates, the Underwriters may be deemed to have received compensation from
the Depositor in the form of underwriting compensation. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the
Offered Certificates may be deemed to be underwriters and any commissions
received by them and any profit on the resale of the Offered Certificates by
them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933, as amended (the "Securities Act").
No Offered Certificate will have an established trading market when issued.
The Underwriters may, from time to time, act as brokers or purchase and sell
Offered Certificates in the secondary market, but the Underwriters are under no
obligation to do so and there can be no assurance that there will be a secondary
market for the Offered Certificates or liquidity in the secondary market if one
does develop.
From time to time the Underwriters or their affiliates may perform
investment banking and advisory services for, and may provide general financing
and banking services to, affiliates of the Depositor.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against described civil liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor, the Sellers and the Servicer by Stroock & Stroock
& Lavan LLP, New York, New York. Certain legal matters with respect to the
Offered Certificates will be passed upon for the Underwriters by McKee Nelson
LLP.
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RATINGS
It is a condition to the issuance of the Offered Certificates that they
receive ratings by S&P, Moody's and Fitch as follows:
<Table>
<Caption>
CLASS S&P MOODY'S FITCH
- ----- ---- ------- -----
AF-1.................................. AAA Aaa AAA
AF-2.................................. AAA Aaa AAA
AF-3.................................. AAA Aaa AAA
AF-4.................................. AAA Aaa AAA
AF-5.................................. AAA Aaa AAA
AF-6.................................. AAA Aaa AAA
MF-1.................................. AA Aa2 AA
MF-2.................................. A A2 A
BF.................................... BBB Baa2 BBB
AV.................................... AAA Aaa AAA
MV-1.................................. AA Aa2 AA
MV-2.................................. A A2 A
BV.................................... BBB Baa2 BBB
A-IO.................................. AAA Aaa AAA
</Table>
A securities rating addresses the likelihood of the receipt by Offered
Certificateholders of distributions on the Home Equity Loans. The rating takes
into consideration the characteristics of the Home Equity Loans and the
structural, legal and tax aspects associated with the Offered Certificates. The
ratings on the Offered Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Home Equity Loans,
the likelihood of payment of any Group I Net WAC Cap Carryover or Group II Net
WAC Cap Carryover or the possibility that Offered Certificateholders might
realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
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INDEX OF DEFINED TERMS
<Table>
<Caption>
TERMS PAGE
- ----- -----------
2/28 Adjustable Rate Loans.................................. S-38
3/27 Adjustable Rate Loans.................................. S-38
60+ Delinquency Percentage (Rolling Three Month)............ S-81
Agreement................................................... S-71
Appraised Values............................................ S-26
Balloon Loans............................................... S-54
Basic Principal Amount...................................... S-76
Book-Entry Certificates..................................... S-75
Business Day................................................ S-76
Cap Agreement............................................... S-92
Carryover Certificates...................................... S-91
Cede........................................................ S-75
Certificate Account......................................... S-75
Certificate Group........................................... S-73
Certificate Principal Balance............................... S-74
Certificate Rate............................................ S-82
Certificate Register........................................ S-75
Certificate Registrar....................................... S-75
Certificateholder........................................... S-75
Certificateowners........................................... S-75
CHEC........................................................ S-25
Class AF-6 Calculation Percentage........................... S-76
Class AF-6 Lockout Distribution Amount...................... S-76
Class AF-6 Lockout Percentage............................... S-76
Class A-IO Certificates..................................... S-74
Class B Principal Distribution Amount....................... S-77
Class Interest Carryover Shortfall.......................... S-77
Class M-1 Principal Distribution Amount..................... S-77
Class M-2 Principal Distribution Amount..................... S-78
Class Monthly Interest Amount............................... S-78
Class Principal Carryover Shortfall......................... S-78
Class R Certificates........................................ S-73
Class X-IO Certificates..................................... S-73
Clearstream, Luxembourg..................................... S-75
Closing Date................................................ S-25
Code........................................................ S-91
Coupon Rate................................................. S-27
CPR......................................................... S-54
Cut-Off Date................................................ S-71
Definitive Certificate...................................... S-75
Delinquency Amount.......................................... S-78
Delinquency Event........................................... S-79
Depositor................................................... S-25
Distribution Date........................................... S-75
DTC......................................................... S-75
ERISA....................................................... S-92
Euroclear................................................... S-75
Excess Interest............................................. S-79
</Table>
S-97
<Table>
<Caption>
TERMS PAGE
- ----- -----------
Excess Overcollateralization Amount......................... S-79
Excluded Plan............................................... S-93
Exemption................................................... S-93
Final Scheduled Distribution Date........................... S-88
Fitch....................................................... S-86
Fixed Rate Certificates..................................... S-73
Group....................................................... S-25
Group I Certificates........................................ S-72
Group I Home Equity Loans................................... S-25
Group I Net WAC Cap......................................... S-85
Group I Net WAC Cap Carryover............................... S-85
Group II Certificates....................................... S-73
Group II Home Equity Loans.................................. S-25
Group II Net WAC Cap........................................ S-86
Group II Net WAC Cap Carryover.............................. S-86
Home Equity Loan Group...................................... S-25
Home Equity Loans........................................... S-25
Interest Period............................................. S-86
LIBOR Determination Date.................................... S-86
Liquidated Loan............................................. S-88
Loan Balance................................................ S-80
London Business Day......................................... S-86
Maximum Rates............................................... S-37
Minimum Bid................................................. S-89
Minimum Rates............................................... S-37
Monthly Remittance Date..................................... S-80
Moody's..................................................... S-86
Mortgaged Properties........................................ S-25
Net Coupon Rate............................................. S-85
Non-Offered Certificates.................................... S-73
Notional Amount............................................. S-74
OC Floor.................................................... S-80
Offered Certificates........................................ S-73
One-Month LIBOR............................................. S-86
Original Combined Loan-to-Value Ratio....................... S-26
Original Loan-to-Value Ratio................................ S-26
Overcollateralization Amount................................ S-80
Plan........................................................ S-93
Prepayment Assumption....................................... S-54
Principal Distribution Amount............................... S-80
prohibited transactions..................................... S-93
PTE......................................................... S-93
Rating Agencies............................................. S-86
Realized Loss............................................... S-88
Record Date................................................. S-80
Reference Banks............................................. S-87
Regular Certificates........................................ S-91
Regular Interests........................................... S-92
Regulation.................................................. S-93
REMIC Regular Certificates.................................. S-91
</Table>
S-98
<Table>
<Caption>
TERMS PAGE
- ----- -----------
REMIC Residual Certificates................................. S-91
REMICs...................................................... S-91
Remittance Period........................................... S-80
Required Overcollateralization Amount....................... S-80
Residual Certificates....................................... S-91
Restricted Group............................................ S-93
S&P......................................................... S-86
Securities Act.............................................. S-95
Sellers..................................................... S-25
Senior Certificates......................................... S-93
Senior Enhancement Percentage............................... S-80
Senior Principal Distribution Amount........................ S-81
Servicer.................................................... S-71
Servicing Fee............................................... S-89
Six-Month Adjustable Rate Loans............................. S-38
Statistical Calculation Date................................ S-25
Statistical Calculation Date Loan Balance................... S-25
Stepdown Date............................................... S-81
Structuring Assumptions..................................... S-54
Subordinate Certificates.................................... S-73
Subordination Deficiency.................................... S-81
Subordination Increase Amount............................... S-81
Supplemental Interest Reserve Fund.......................... S-91
Supplemental Interest Reserve Fund Deposit.................. S-91
Telerate Page 3750.......................................... S-87
Transition Expenses......................................... S-81
Trigger Event............................................... S-81
Trust....................................................... S-25
Trustee..................................................... S-71
Trustee Fee................................................. S-90
Underwriters................................................ S-95
Underwriting Agreement...................................... S-95
Variable Rate Certificates.................................. S-73
weighted average life....................................... S-54
</Table>
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except under limited circumstances, the globally offered Centex Home Equity
Loan Asset-Backed Certificates, Series 2002-B (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through any of DTC, Euroclear or Clearstream, Luxembourg.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Euroclear and Clearstream, Luxembourg will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior home equity loan asset-backed
certificates issues.
Secondary cross-market trading between Euroclear or Clearstream, Luxembourg
and DTC participants holding Offered Certificates will be effected on a
delivery-against-payment basis through the respective depositaries of Euroclear
and Clearstream, Luxembourg and as DTC participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless the holders meet established requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Euroclear and Clearstream,
Luxembourg will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold the positions in accounts as
DTC participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior home equity loan asset-backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Euroclear or
Clearstream, Luxembourg accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and sellers'
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Euroclear and/or Clearstream, Luxembourg
Participants. Secondary market trading between Euroclear participants or
Clearstream, Luxembourg participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds.
I-1
Trading between DTC Seller and Euroclear or Clearstream, Luxembourg
Purchaser. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Euroclear participant or a Clearstream,
Luxembourg participant, the purchaser will send instructions to Euroclear or
Clearstream, Luxembourg through a Euroclear participant or Clearstream,
Luxembourg participant at least one business day prior to settlement. Euroclear
or Clearstream, Luxembourg will instruct the respective depositary, as the case
may be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the accrual period and a year assumed to consist of 360
days or a 360-day year of twelve 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective depositary of the
DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Euroclear participant's or Clearstream, Luxembourg
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Euroclear or Clearstream,
Luxembourg cash debt will be valued instead as of the actual settlement date.
Euroclear participants and Clearstream, Luxembourg participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Euroclear or
Clearstream, Luxembourg. Under this approach, they may take on credit exposure
to Euroclear or Clearstream, Luxembourg until the Global Securities are credited
to their accounts one day later.
As an alternative, if Euroclear or Clearstream, Luxembourg has extended a
line of credit to them, Euroclear participants or Clearstream, Luxembourg
participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Euroclear participants
or Clearstream, Luxembourg participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Euroclear participant's or Clearstream,
Luxembourg participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending Global Securities to
the respective European depositary for the benefit of Euroclear participants or
Clearstream, Luxembourg participants. The sale proceeds will be available to the
DTC Seller on the settlement date. Thus, to the DTC participants a cross-market
transaction will settle no differently than a trade between two DTC
participants.
Trading between Euroclear or Clearstream, Luxembourg Seller and DTC
Purchaser. Due to time zone differences in their favor, Euroclear participants
and Clearstream, Luxembourg participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Euroclear or Clearstream,
Luxembourg through a Euroclear participant or Clearstream, Luxembourg
participant at least one business day prior to settlement. In these cases
Euroclear or Clearstream, Luxembourg will instruct the respective depositary, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either the actual number of days in the accrual period and a
year assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For
I-2
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Euroclear participant or Clearstream,
Luxembourg participant the following day, and receipt of the cash proceeds in
the Euroclear participant's or Clearstream, Luxembourg participant's account
would be back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Euroclear participant or
Clearstream, Luxembourg participant have a line of credit with its respective
clearing system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Euroclear participant's or Clearstream, Luxembourg participant's account would
instead be valued as of the actual settlement date.
Finally, day traders that use Euroclear or Clearstream, Luxembourg and that
purchase Global Securities from DTC participants for delivery to Euroclear
participants or Clearstream, Luxembourg participants should note that these
trades would automatically fail on the sale side unless affirmative action were
taken. At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through Euroclear or Clearstream, Luxembourg for one day
(until the purchase side of the day trade is reflected in their
Euroclear or Clearstream, Luxembourg accounts) in accordance with
the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their
Euroclear or Clearstream, Luxembourg account in order to settle the
sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is
at least one day prior to the value date for the sale to the
Euroclear participant or Clearstream, Luxembourg participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% (or in some cases 31%) U.S.
withholding tax that generally applies to payments of interest on registered
debt issued by U.S. persons, unless (1) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between the beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (2) the beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. persons (Form W-8 BEN). Beneficial owners of Global
Securities that are non-U.S. persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 BEN. If the information shown on
Form W-8 BEN changes, a new Form W-8 BEN must be filed within 30 days of the
change.
Exemption for non-U.S. persons with effectively connected income (Form
W-8ECI). A non-U.S. person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form W-8ECI.
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form W-8 BEN). Non-U.S. persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form W-8 BEN.
I-3
Exemption for U.S. persons (Form W-9). U.S. persons can obtain a complete
exemption from the withholding tax by filing Form W-9.
U.S. Federal Income Tax Reporting Procedure. The Global Securities holder
files by submitting the appropriate form to the person through whom he holds
(e.g., the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Forms W-8 BEN and W-8ECI are generally effective for
three calendar years.
U.S. Person. As used in this prospectus supplement the term "U.S. person"
means a beneficial owner of an Offered Certificate that is for United States
federal income tax purposes
- a citizen or resident of the United States,
- a corporation or partnership created or organized in or under the laws of
the United States or of any State thereof or the District of Columbia,
- an estate the income of which is subject to United States federal income
taxation regardless of its source, or
- a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust.
As used in this prospectus supplement, the term "non-U.S. person" means a
beneficial owner of an Offered Certificate that is not a U.S. person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities or
with the application of the extensive withholding regulations that are generally
effective with respect to payments made after December 31, 2000 which have
detailed rules regarding the determination of beneficial ownership. Investors
are advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-4
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
------------------------------
CHEC FUNDING, LLC
(DEPOSITOR)
CENTEX HOME EQUITY COMPANY, LLC
(SELLER AND SERVICER)
------------------------------
OFFERED SECURITIES
Asset-backed certificates and asset-backed notes will be sold from time to
time pursuant to a prospectus supplement in amounts, at prices and on terms to
be determined at the time of sale. Each series will include one or more classes
of certificates or one or more classes of notes with differing payment terms,
priority of payments and maturities.
A series of certificates will evidence undivided interests in a trust fund
created in connection with the issuance of the series. A series of notes will be
issued pursuant to an indenture and secured by the trust fund. In each case, the
certificates and notes will be payable only from the assets of the trust fund.
Separate trust funds may be established for one or several classes of a
series of notes or certificates, with each class or group of classes being
entitled to payment only from the assets of their individual trust fund.
Crosscollateralization among trust funds may be permitted.
Credit enhancement will be provided for all offered securities.
TRUST FUND
Each trust fund will include the following assets, among others:
- closed-end home equity loans secured by first or second mortgages on one-
to four- family residential or mixed properties
- amounts received or due on the home equity loans
- the mortgaged properties securing the home equity loans and certain
proceeds of liquidation of these properties
- funds on deposit in one or more prefunding, capitalized interest or other
accounts
- reserve funds, letters of credit, surety bonds, insurance policies and/or
other forms of credit enhancement
Prefunding accounts may be established to purchase additional home equity
loans during a specified prefunding period.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT ARE
TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
MARCH 13, 2002
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND IN
THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the offered securities in two separate
documents that provide progressively more detail:
- this prospectus, which provides general information, some of which may
not be applicable to your series of notes or certificates; and
- the accompanying prospectus supplement, which describes the specific
terms of your series of notes or certificates.
IF THE DESCRIPTION OF YOUR NOTES OR CERTIFICATES IN THE ACCOMPANYING
PROSPECTUS SUPPLEMENT DIFFERS FROM THE RELATED DESCRIPTION IN THIS PROSPECTUS,
YOU SHOULD RELY ON THE INFORMATION IN THAT PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Reports to Holders", "Where You Can Find More Information" and
"Incorporation of Certain Documents by Reference" in this prospectus. You can
request information incorporated by reference from Centex Home Equity Company,
LLC by calling us at (214) 981-5000 or writing to us at Centex Home Equity
Company, LLC, 2828 N. Harwood Street, Dallas, Texas, 75201. We have not
authorized anyone to provide you with different information. We are not offering
the notes or certificates in any state where the offer is not permitted.
2
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PROSPECTUS SUPPLEMENT...................... 4
REPORTS TO HOLDERS......................... 4
INTRODUCTION............................... 5
THE DEPOSITOR.............................. 5
THE SELLER AND THE SERVICER................ 5
General.................................. 5
Underwriting Guidelines Applicable to the
Home Equity Loans...................... 6
Underwriting Criteria of the Seller...... 9
Servicing................................ 12
DESCRIPTION OF THE SECURITIES.............. 13
General.................................. 13
Book-Entry Securities.................... 15
Valuation of the Home Equity Loans....... 19
Payments of Interest..................... 20
Payments of Principal.................... 20
Final Scheduled Distribution Date........ 20
Special Redemption....................... 21
Weighted Average Life of the
Securities............................. 21
Ratings.................................. 22
THE TRUST FUNDS............................ 22
General.................................. 22
The Home Equity Loans.................... 23
Additional Information About the Home
Equity Loans........................... 24
ACCOUNTS................................... 25
Certificate and Distribution Accounts.... 25
Prefunding and Capitalized Interest
Accounts............................... 26
Eligible Investments..................... 27
Revolving Period and Amortization Period;
Retained Interest...................... 27
ENHANCEMENT................................ 28
THE AGREEMENTS............................. 29
General.................................. 29
Repurchase and Substitution of Non-
Conforming Home Equity Loans........... 29
Assignment of Home Equity Loans.......... 31
Deposits to Principal and Interest
Account and Certificate Account........ 32
Advances; Compensating Interest.......... 34
Optional Repurchase of Defaulted Home
Equity Loans........................... 35
Realization Upon Defaulted Home Equity
Loans.................................. 35
Hazard Insurance......................... 35
Servicing................................ 36
General Servicing Standard............... 36
Sub-Servicing Arrangements............... 37
Certain Matters Regarding the Servicer... 37
Removal and Resignation of Servicer...... 38
The Trustee.............................. 38
Reporting Requirements................... 39
Removal of Trustee for Cause............. 40
Governing Law............................ 40
Amendments............................... 41
</Table>
<Table>
<Caption>
PAGE
----
Termination of the Trust................. 41
Optional Termination..................... 41
REMIC Administrator...................... 44
CERTAIN LEGAL ASPECTS OF THE HOME EQUITY
LOANS.................................... 44
Home Equity Loans........................ 44
Foreclosure.............................. 45
Rights of Redemption..................... 46
Junior Home Equity Loans; Rights of
Senior Home Equity Loans............... 47
Anti-Deficiency Legislation and Other
Limitations on Lenders................. 48
Due-on-Sale Clauses in Home Equity
Loans.................................. 49
Enforceability of Prepayment and Late
Payment Fees........................... 49
Equitable Limitations on Remedies........ 49
Applicability of Usury Laws.............. 50
Environmental Legislation................ 50
Soldiers' and Sailors' Civil Relief Act
of 1940................................ 51
USE OF PROCEEDS............................ 51
FEDERAL INCOME TAX CONSEQUENCES............ 51
General.................................. 51
Opinions................................. 52
Taxation of Debt Securities (Including
Regular Interest Securities)........... 53
Status of Regular Interest Securities.... 59
REMIC Expenses; Single Class REMICs...... 59
Taxation of the REMIC.................... 60
Taxation of Holders of Residual Interest
Securities............................. 61
Administrative Matters................... 64
Tax Status as a Grantor Trust............ 64
Miscellaneous Tax Aspects................ 67
Tax Treatment of Foreign Investors....... 68
Tax Characterization of the Trust as a
Partnership............................ 69
Tax Consequences to Holders of the Notes
Issued by a Partnership................ 70
Tax Consequences to Holders of the
Certificates Issued by a Partnership... 70
STATE TAX CONSEQUENCES..................... 74
ERISA CONSIDERATIONS....................... 74
General.................................. 74
ERISA Considerations Relating to
Certificates........................... 75
Underwriter Exemption.................... 75
ERISA Considerations Relating to Notes... 80
LEGAL INVESTMENT........................... 81
PLAN OF DISTRIBUTION....................... 81
LEGAL MATTERS.............................. 82
WHERE YOU CAN FIND MORE INFORMATION........ 82
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE................................ 83
</Table>
3
PROSPECTUS SUPPLEMENT
The prospectus supplement relating to a series of securities to be offered
under this prospectus will, among other things, set forth with respect to the
series of securities:
- the aggregate principal amount, interest rate and authorized
denominations of each class;
- the type of securities to be issued with respect to each class;
- certain information concerning the home equity loans;
- the terms of any credit enhancement with respect to the series;
- the terms of any insurance related to the home equity loans;
- information concerning any other assets in the related trust fund,
including any reserve fund;
- the final scheduled distribution date of each class;
- the method to be used to calculate the amount of interest and principal
required to be applied to the securities of each class of the series on
each distribution date, and the timing, order of priority and allocation
of distributions of interest and principal among the classes;
- the distribution dates on which payments of principal and interest on the
securities, along with other amounts specified in the prospectus
supplement, are made;
- any assumed reinvestment rate with respect to funds held in any fund or
account for the series;
- the amount, if any, deposited in a prefunding account available to
purchase additional home equity loans, the length of the prefunding
period and the criteria for determining which additional home equity
loans may become part of the trust fund;
- additional information with respect to the plan of distribution of the
securities; and
- whether one or more real estate mortgage investment conduit (REMIC)
elections will be made under U.S. federal income tax laws with respect to
some or all of the trust fund for the series and, if so, the designation
of the offered securities as regular interests or residual interests in a
REMIC.
REPORTS TO HOLDERS
Depending on whether a series of certificates or a series of notes is being
issued, the agreements governing the transaction will include:
- a pooling and servicing agreement for a transaction involving the
issuance of certificates; or
- a sale and servicing agreement, an indenture and a trust agreement for a
transaction involving the issuance of notes.
The agreements require periodic and annual reports concerning the related
trust fund for a series of securities to be forwarded to holders of the
securities. Unless otherwise specified in the related prospectus supplement,
these reports will not be examined and reported on by an independent public
accountant. If specified in the prospectus supplement for a series of
securities, the series or one or more classes of the series will be issued in
book-entry form. In this case, owners of the notes or certificates will not be
considered "holders" under the agreements and will not receive any reports
directly. Instead, reports will be furnished to owners through the participants
and indirect participants of the applicable book-entry system. References in
this prospectus to the rights of "holders" will refer to the rights of owners as
they may be exercised indirectly through these participants.
We refer you to "THE AGREEMENTS--Reporting Requirements" for more detail.
4
INTRODUCTION
This prospectus provides for the issuance of series of certificates or
notes consisting of one or more classes, one or more of which may be classes of:
- Compound Interest Securities
- Variable Interest Securities
- Planned Amortization Class Securities
- Zero Coupon Securities
- Principal Only Securities
- Interest Only Securities
Certain classes of securities may be subordinated to other classes, both as
to payment priority and as to allocation of losses on the home equity loans. In
addition, securities representing a retained interest in the residual value of
the trust fund may be provided for. Each class may differ in, among other
things, payment terms and priorities, final scheduled distribution dates and
distribution dates with respect to distributions of interest and principal.
The certificates will represent interests in, and the notes will be secured
by, all or a portion of the assets in the trust fund with respect to the series
issued. Where one or more classes of securities are backed by only a portion of
the assets in the trust fund, it will, unless crosscollateralization is
permitted pursuant to the related agreement, only be entitled to payment out of
the assets of its portion of the trust fund.
This prospectus provides for various features, including a prefunding
account to be used to purchase assets after the closing date for a specified
prefunding period, revolving and amortizing periods, and optional termination of
the trust. Credit enhancement is available in a number of forms, which are
discussed in this prospectus.
THE DEPOSITOR
Unless otherwise specified in the prospectus supplement, CHEC Funding, LLC
will act as depositor. CHEC Funding, LLC is a Delaware limited liability company
formed in December 1999, and is a wholly-owned subsidiary of the seller, Centex
Home Equity Company, LLC. The depositor maintains its principal offices at 2728
N. Harwood Street, Dallas, Texas, 75201. Its telephone number is (214) 981-5000.
The depositor does not have, nor is it expected in the future to have, any
significant assets.
THE SELLER AND THE SERVICER
GENERAL
The seller and servicer, Centex Home Equity Company, LLC, a Delaware
limited liability company, is a sub-prime mortgage lender formed in 1994 that
engages in originating primarily non-conforming home equity loans, through five
major origination sources. The seller was originally named Nova Credit
Corporation and was headquartered in Denver, Colorado. In the first calendar
quarter of 1997, the seller's operations were moved to Dallas, Texas and the
seller underwent a reorganization and the hiring of a new management team. In
April 1997, the seller's name was changed to Centex Credit Corporation. In
September of 2001, the seller merged into its wholly-owned subsidiary, Centex
Home Equity Company, LLC, a Delaware limited liability company, with Centex Home
Equity Company, LLC becoming the surviving entity. The seller is a wholly-owned
subsidiary of Centex Financial Services, Inc., a financial services subsidiary
of Centex Corporation, headquartered in Dallas, Texas. Centex Corporation is a
publicly traded, diversified company with a market capitalization of
approximately $3.6 billion and is primarily engaged in the home building,
financial services and contracting and construction services
5
industries. The seller is also affiliated with CTX Mortgage Company, LLC, a
Delaware limited liability company, which originates home mortgage loans
conforming to the guidelines of the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Since
inception, the seller has focused on lending to individuals who have substantial
equity in their homes but have impaired or limited credit histories. The
seller's home equity loans to these borrowers are made for many purposes such as
debt consolidation, refinancing, home improvement and educational expenses.
Substantially all of the seller's home equity loans are secured by first or
second mortgage liens on one- to four-family residences, and have amortization
schedules ranging from 5 to 30 years.
The seller is currently licensed to do business in 48 states plus the
District of Columbia and employs approximately 1,372 people located in 140
offices in 42 states. The seller originates home equity loans through its retail
branch network of 64 branch offices located in 31 states. In addition, the
seller originates home equity loans through a broker referral network from four
division offices with a total of 16 regions. A third production source for the
seller is referral of home equity loans from its affiliate conforming mortgage
company, CTX Mortgage Company, LLC. A fourth source of origination of home
equity loans for the seller is purchases of loans from wholesale sources
approved by the seller. The final source of origination of home equity loans is
the seller's direct sales unit which sources loans through telemarketing and
direct mail efforts. The seller's strategy is to utilize these origination
channels to generate growth in the volume of the home equity loans originated
while diversifying sources of the home equity loans and maintaining emphasis on
its underwriting standards.
The seller has centralized its underwriting, servicing and quality control
functions in its Dallas headquarters, which are located at 2828 N. Harwood
Street, Dallas, Texas, 75201. Its telephone number is (214) 981-5000.
The seller will sell home equity loans to the depositor, which will then
transfer the loans to the relevant trust fund. In addition, as specified in the
related prospectus supplement, certain affiliates of the seller may sell home
equity loans to the depositor if such loans were originated or acquired by the
seller. References in this prospectus to the transfer of home equity loans by
the seller to the depositor will be deemed to include, unless the context
indicates otherwise, sales of home equity loans by affiliates of the seller to
the depositor as provided in the related prospectus supplement.
UNDERWRITING GUIDELINES APPLICABLE TO THE HOME EQUITY LOANS
THE PRE-UNDERWRITING PROCESS. The seller's home equity loan application
process is conducted by the seller's branch officers and approved mortgage
brokers who compile information necessary for the seller's underwriting
department to evaluate the home equity loan. The approval process is generally
coordinated over the telephone with applications and credit reports obtained by
branch processors or brokers and usually sent by facsimile transmission to the
processing department at one of the seller's offices. Branch personnel
communicate with the seller's centralized underwriting staff, located in Dallas,
Texas, which consists of approximately 35 underwriters. The seller also employs
17 other underwriters in four divisional offices, which have loan approval
authority on a limited basis. Branch operation personnel review the applicant's
credit history, based on the information contained in the application as well as
reports available from credit reporting bureaus, to see if the credit history is
acceptable given the seller's underwriting guidelines. A credit report from one
approved repository is required for pre-approval and one preferred credit bureau
report or two credit reports are required prior to underwriting review. These
credit reports are the primary means utilized to verify each borrower's mortgage
and other debt payment histories. Based on this review, the proposed terms of
the home equity loan are then communicated to the branch officer or broker
responsible for the application who in turn discusses the proposal with the home
equity loan applicant. If the applicant accepts the proposed terms, a branch
officer or broker will gather additional information necessary for the
underwriting, closing and funding of the loan.
THE STANDARD NON-CONFORMING PROGRAM. The home equity loans were originated
under, or, if acquired by the seller from wholesale sources, were reunderwritten
to comply with, the seller's Standard
6
Non-Conforming Program. The Standard Non-Conforming Program is applicable to
residential loans which, for credit reasons, do not conform to "traditional
lenders" underwriting guidelines comparable to those employed by savings and
loans and commercial banks. The seller began underwriting home equity loans in
accordance with the Standard Non-Conforming Program in May 1997.
The seller's underwriting standards under the Standard Non-Conforming
Program are primarily intended to assess the creditworthiness of the mortgagor
and the value of the mortgaged property and to evaluate the adequacy of the
property as collateral for the home equity loan. While the seller's primary
consideration in underwriting a home equity loan is the borrower's employment
stability and debt-to-income ratio, the condition and value of the mortgaged
property relative to the amount of the home equity loan is another critical
factor. In addition, it also considers, among other things, a mortgagor's credit
history and repayment ability, as well as the type and use of the mortgaged
property.
The seller currently employs approximately 45 underwriters and has its
underwriting functions primarily centralized in its Dallas, Texas headquarters.
The seller does not delegate underwriting authority to any broker or
correspondent lender. The seller's underwriting department functions
independently of its mortgage origination departments. Underwriters are
compensated on a salary basis, and not through commissions.
The seller's policy is that every home equity loan is reviewed and approved
by an underwriter with assigned approval authorities. Home equity loans
exceeding those authorities require a second approval, generally from a manager
of underwriting or an underwriting supervisor.
The seller has established classifications with respect to the credit
profile of the applicant, and each loan is placed into one of seven ratings "A+"
through "D". Terms of loans made by the seller as well as maximum loan-to-value
ratios and debt-to-income ratios vary depending on the classification of the
applicant. Home equity loan applicants with less favorable credit ratings are
generally offered home equity loans with higher interest rates and lower
loan-to-value ratios than applicants with more favorable credit ratings.
The home equity loans underwritten under the seller's Standard
Non-Conforming Program are fixed and adjustable rate loans. Except for balloon
loans, the fixed rate home equity loans originated by the seller have
amortization schedules ranging from 5 to 30 years, and generally require equal
monthly payments that are due as of a scheduled day of each month which is fixed
at the time of origination. The fixed rate balloon loans originated by the
seller generally provide for scheduled amortization over 30 years, with a
maturity date and a balloon payment at the end of the 15th year. The seller
originates adjustable rate mortgage (ARM) loan products called six-month ARMs,
2/28 ARMs or 3/27 ARMs each of which bear interest at rates which adjust based
on the six-month London interbank offered rate (LIBOR), with the initial rate
adjustment date being either six months, 24 months or 36 months after the date
of origination of the loan, respectively. The six-month ARMs amortize over 15 to
30 years, adjust every six months and allow for a maximum periodic rate
adjustment of 1.00%. The maximum adjustment over the life of a six-month ARM is
capped at 7.00% above the initial interest rate of the loan and the minimum
interest rate is generally equal to the initial interest rate. The 2/28 and the
3/27 ARMs amortize over 30 years, have an initial interest rate adjustment date
which is 24 months or 36 months, respectively, after the date of origination and
allow for a maximum rate adjustment on the initial interest rate adjustment date
of 2.00%. After the initial rate adjustment date, the 2/28 ARMs and the 3/27
ARMs adjust every six months, allow for a maximum periodic rate adjustment of
1.00%, have a lifetime cap on interest rate adjustments of 7.00% above the
initial interest rate of the loan and allow for a minimum rate generally equal
to the initial interest rate of the loan. The seller does not currently
originate ARMs with a balloon feature.
The principal amounts of the home equity loans originated by the seller
generally range from a minimum of $5,000 to a maximum of $500,000. The
collateral securing loans originated by the seller are generally one- to
four-family residences, including condominiums, cooperatives, townhomes and
manufactured housing treated as real property under applicable state law. These
properties may or may not
7
be occupied by the owner. It is the seller's policy not to accept commercial
properties, mixed-use properties or unimproved land as collateral. Rural
property requires a 5% reduction in loan-to-value ratio. Second mortgages
require a 5% reduction in loan-to-value ratio on owner occupied property. The
seller generally does not originate second lien home equity loans where any
senior mortgage lien allows for open-end advances or negative amortization, is a
private party mortgage or has shared appreciation provisions.
The seller has established a "piggyback" program under which the seller may
originate a first and second lien home equity loan with the same borrower and
secured by the same property simultaneously. Under the "piggyback" program, the
loan-to-value ratio of the first mortgage must meet standard "A+", "A-1" or
"A-2" product guidelines. The second mortgage is allowed a combined
loan-to-value ratio of up to 100%. Under the program, second mortgages must
meet, in addition to standard program requirements, certain other requirements,
including a maximum loan size of $70,000, a maximum loan term of 180 months,
collateral consisting of a single family detached owner occupied property, "Full
Documentation" from the borrower as described below and an "A-2" or better
credit standard.
The home equity loans underwritten under the Standard Non-Conforming
Program are underwritten pursuant to the "Full Documentation" residential loan
program, the "Limited Documentation" residential loan program or the "Stated
Income" residential loan program. Under each of these programs, the seller
reviews the home equity loan applicant's source of income, calculates the amount
of income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the
debt-to-income ratio to determine the applicant's ability to repay the home
equity loan, reviews the type and use of the property being financed and reviews
the property for compliance with the seller's standards. In determining an
applicant's ability to repay a six-month ARM, the seller uses a qualifying rate
equal to six-month LIBOR plus a margin. In determining an applicant's ability to
repay a 2/28 ARM or a 3/27 ARM, the seller uses a qualifying rate equal to
six-month LIBOR plus a margin up to 2.50%. It is the policy of the seller for
its underwriting process to consist of a thorough credit review and a thorough
appraisal review on each home equity loan by its underwriting department. In
addition, the seller performs a separate appraisal review by the seller's
appraisal review department on home equity loans considered to be higher risk
loans. These include Limited Documentation Program loans, Stated Income Program
loans, loans secured by multi-unit properties, loans secured by non-owner
occupied collateral, loans with higher loan-to-value ratios, and loans involving
non-approved appraisers. Finally, the seller performs a full compliance review
to ensure that all documents have been properly prepared, all applicable
disclosures given in a timely fashion and all federal and state regulations
properly complied with. Appraisals are performed by third party, independent,
fee-based, state-licensed appraisers generally approved by the seller's staff
appraiser and generally conforming to current Fannie Mae and/or Freddie Mac
secondary market requirements for residential property appraisals. Each
appraisal includes, among other things, an inspection of the interior and
exterior of the subject property and data from sales within the same general
location as the subject property where available.
The seller's underwriting criteria require it to determine the income of
each borrower and the source of funds (if applicable). Under the Full
Documentation Program, it is the policy of the seller that home equity loans to
borrowers who are salaried employees be supported by current employment
information in addition to employment history. This information for salaried
borrowers is verified based on any of the following: written confirmation from
employers, one or more pay-stubs, recent W-2 tax forms or recent tax returns. In
addition, a telephone confirmation of employment is made. Under the Limited
Documentation Program, self-employed borrowers are qualified based upon monthly
income stated on the home equity loan application. Current tax return or six
months of current bank statements and a signed profit and loss statement are
obtained to verify existence of business and acceptable cash flow. Under the
Stated Income Program, borrowers are qualified based upon monthly income as
stated on the home equity loan application and telephone confirmation of
employment. Self-employed borrowers under the Stated Income
8
Program are required to submit a business license, current bank statements and
verification with directory assistance to ensure existence of the business.
Verification of the applicant's source of funds (if any) is generally
required under purchase money programs in the form of a standard verification of
deposit, current bank statement or other acceptable documentation. Twelve months
of mortgage payments or rental history must be verified by lender or landlord.
If appropriate compensating factors exist, the seller may waive certain
documentation requirements for individual borrowers. All documentation should be
no more than 60 days old at underwriting and no more than 90 days old at the
time of the funding of the related loan. Upon completion of a home equity loan's
underwriting and processing, the closing of the loan is scheduled with a closing
attorney or agent approved by or the seller. The closing attorney or agent is
responsible for completing the loan closing transaction in accordance with
applicable law and the seller's operating procedures. Title insurance that
insures the seller's interest as mortgagee and evidence of adequate homeowner's
insurance naming the seller and its assignees as an additional insured party are
required on all loans.
CREDIT INSURANCE. The seller is currently underwriting some of its home
equity loans with truncated decreasing credit insurance that is underwritten by
an unrelated third party. One type of credit insurance is credit life insurance
which provides for the payment of indebtedness upon the death of the insured.
This type of insurance may be underwritten as either joint insurance (covering
both borrower and co-borrower) or single insurance (covering the primary
borrower only). The maximum coverage amount of the credit life insurance is
$100,000 and is based upon a net payoff basis. The term of the coverage is
limited to five years. Borrowers have the option of paying for the credit life
insurance by payment of a single premium that is financed as part of the home
equity loan balance or by payment of monthly premiums that are not financed as
part of the home equity loan balance. The insured can voluntarily cancel the
monthly premium policy at any time and the monthly premium policy can be
cancelled by the insurer if three monthly premiums become delinquent.
A second type of credit insurance is involuntary unemployment insurance.
This type of insurance pays to the creditor the scheduled monthly payment
obligation of an insured debtor in cases where the debtor has become unemployed
involuntarily. The maximum monthly benefit is $750 with the term of the
insurance being limited to five years.
UNDERWRITING CRITERIA OF THE SELLER
"A+" RISK. Under the "A+" risk category, the prospective borrower must
have repaid installment or revolving consumer debt according to its terms with
no 30-day late payments within the last 12 months and within the prior 12 month
period no 30-day late payments are permitted on an existing mortgage. No
collection accounts, unpaid charge-offs, judgments or a derogatory public record
is permitted within the past two years (except medical collections under $500).
No bankruptcy or foreclosure may have occurred during the preceding seven years
commencing from the date of discharge or the date the foreclosure was filed. No
state or federal tax liens (paid or unpaid) and no delinquent property taxes are
permitted in the last two years. A maximum loan-to-value ratio of 90% for home
equity loans originated under the Full Documentation Program (85% for the
Limited Documentation Program or 80% for the Stated Income Program) is permitted
for a home equity loan of less than $500,000 on an owner-occupied property. A
maximum loan-to-value ratio of 85% for a home equity loan originated under the
Full Documentation Program (75% for the Limited Documentation Program or 70% for
the Stated Income Program) is permitted for a home equity loan of less than
$500,000 on non-owner occupied property. The maximum debt service-to-income
ratio is 45%.
"A-1" RISK. Under the "A-1" risk category, the prospective borrower must
have generally repaid installment or revolving debt according to its terms with
no 60-day late payments within the last 12 months. A maximum of one 30-day late
payment is acceptable in the last 12 months on an existing mortgage. Consecutive
30-day delinquencies may be considered as a single late. This is limited to
30-days
9
late only. Minor derogatory items are allowed as to non-mortgage credit. No
collection accounts, charge-offs or judgments over $500 within the last two
years are allowed. No bankruptcy or notice of default filings by the borrower
may have occurred during the preceding five years. A maximum loan-to-value ratio
of up to 90% (85% for the Limited Documentation Program or 80% for the Stated
Income Program) is permitted for a home equity loan on a one-to-four family
owner-occupied property. A maximum loan-to-value ratio of up to 85% (75% for the
Limited Documentation Program or 70% for the Stated Income Program) is permitted
for a home equity loan on a non-owner occupied property. The debt service-to-
income ratio generally is 50% or less based on the relevant qualifying rate for
the home equity loan. The maximum loan amount is $500,000 for a one-to-four
family property under the Full Documentation Program. The maximum loan amount is
$350,000 for a home equity loan on a one-to-four family property under the
Limited Documentation Program or Stated Income Program. Exceptions to the
maximum loan amount for a single-family, owner occupied property are considered
by the seller on a limited basis.
"A-2" RISK. Under the "A-2" risk category, the prospective borrower must
have generally repaid installment or revolving debt according to its terms with
no 90-day late payments within the last 12 months. A maximum of two 30-day late
payments and no 60-day late payments within the last 12 months is acceptable on
an existing home equity loan. Minor derogatory items are allowed as to non-
mortgage credit. No unpaid collection accounts, charge-offs or judgments over
$1,000 within the last two years are allowed. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding three years. A
maximum loan-to-value ratio of up to 90% (80% for the Limited Documentation
Program or 80% for the Stated Income Program) is permitted for a home equity
loan on a one-to-four family owner occupied property. A maximum loan-to-value
ratio of up to 80% (75% for the Limited Documentation Program or 65% for the
Stated Income Program) is permitted for a home equity loan on a non-owner
occupied property. The debt service-to-income ratio generally is 50% or less
based on the relevant qualifying rate of the home equity loan. The maximum loan
amount is $500,000 for a one-to-four family property under the Full
Documentation Program. The maximum loan amount is $350,000 for a home equity
loan on a one-to-four family property under the Limited Documentation Program or
Stated Income Program. Exceptions to the maximum loan amount for a
single-family, owner occupied property are considered by the seller on a limited
basis.
"B" RISK. Under the "B" risk category, the prospective borrower must have
generally repaid consumer debt according to its terms with no 120-day late
payments within the last 12 months. A maximum of three 30-day late payments
within the last 12 months is acceptable on an existing home equity loan on the
subject property. As to non-mortgage credit, some prior defaults may have
occurred. Isolated and insignificant collections and/or charge-offs and
judgments within the last 24 months less than $2,500 are permitted and are not
required to be paid from the proceeds of the home equity loan. No bankruptcy or
foreclosure by the borrower may have occurred during the preceding 24 months. A
maximum loan-to-value ratio of 85% (80% for the Limited Documentation Program or
75% for the Stated Income Program) is permitted for a home equity loan on a
one-to-four family owner occupied property. A maximum loan-to-value ratio of 75%
(70% for the Limited Documentation Program or 65% for the Stated Income Program)
is permitted for a home equity loan on a non-owner occupied property. The debt
service-to-income ratio generally is 50% or less based on the relevant
qualifying rate for the home equity loan. The maximum loan amount is $500,000
for a one-to-four family property under the Full Documentation Program. The
maximum loan amount is $350,000 for home equity loans originated under the
Limited Documentation Program or Stated Income Program.
"C-1" RISK. Under the "C-1" risk category, the prospective borrower may
have experienced significant credit problems in the past. Installment debt may
have been up to 120 days delinquent within the last twelve months. A maximum of
one 60-day late payment within the last 12 months is acceptable on an existing
home equity loan. The existing home equity obligation can be up to 60 days past
due at the funding of the loan. As to non-mortgage credit, significant prior
defaults may have occurred. There may be open collections or charge-offs not to
exceed $2,500 and up to $5,000 in isolated circumstances. However, collection
accounts, unpaid charge-offs or judgments are not required to be paid from the
proceeds of the
10
home equity loan. No bankruptcy or notice of default filings by the borrower may
have occurred during the preceding 12 months. A maximum loan-to-value ratio of
80% (75% for the Limited Documentation Program or 70% for the Stated Income
Program) is permitted for a home equity loan on a one-to-four family
owner-occupied property. A maximum loan-to-value ratio of 70% (65% for the
Limited Documentation Program) is permitted for a home equity loan on a
non-owner-occupied property. The debt service-to-income ratio is generally 50%
or less based on the relevant qualifying rate for the home equity loan. The
maximum loan amount is $350,000 for a home equity loan on a one-to-four family
owner-occupied or non-owner occupied property. The maximum loan amount is
$250,000 on the Limited Documentation Program.
"C-2" RISK. Under the "C-2" risk category, the prospective borrower may
have experienced significant credit problems in the past. Installment debt may
have been up to 120 days delinquent within the last twelve months. A maximum of
two 60-day late payments or one 90-day late payment within 12 months is
acceptable on an existing home equity loan on the subject property. The existing
home equity obligation can be up to 90 days past due at the funding of the loan.
As to non-mortgage credit, significant prior defaults may have occurred. There
may be open collections or charge-offs not to exceed $5,000 and collection
accounts, unpaid charge-offs or judgments are not required to be paid from the
proceeds of the home equity loan. No bankruptcy or notice of default filings by
the borrower may have occurred during the preceding 6 months. A maximum
loan-to-value ratio of 75% is permitted for a home equity loan on a one-to-four
family owner-occupied property. A maximum loan-to-value ratio of 65% is
permitted for a home equity loan on a non-owner-occupied property. The debt
service-to-income ratio is generally 50% or less based on the relevant
qualifying rate for the home equity loan. The maximum loan amount is $350,000.
"D" RISK. Under the "D" risk category, the prospective borrower may have
experienced significant credit problems in the past. As to non-mortgage credit,
significant prior defaults may have occurred. The borrower is sporadic in some
or all areas with a disregard for timely payment or credit standing. With
respect to an existing home equity loan on the subject property, the home equity
loan may be no more than one time 120 days late and may be in foreclosure
proceedings. The existing home equity loan is not required to be current at the
time the application is submitted. The borrower may have open collections,
charge-offs and judgments, which are generally paid through the loan proceeds if
the amount exceeds $5,000. Bankruptcy or notice of default filings by the
borrower may be present at the time of the loan. A maximum loan-to-value ratio
of 70% is permitted for a home equity loan on a one-to-four family owner-
occupied property. A maximum loan to value ratio of 50% is permitted for a home
equity loan on non-owner occupied one-to-four family property. The maximum loan
amount is $350,000. The debt service-to-income ratio generally is 50% or less
based on the relevant qualifying rate for the home equity loan.
EXCEPTIONS. As described above, the seller uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis, it
may determine that the prospective borrower warrants a risk category upgrade, a
debt service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular risk
category. An upgrade or exception may generally be allowed if the application
reflects certain compensating factors, among others:
- reduced loan-to-value ratio;
- good property maintenance;
- mortgage history consistent with the risk category upgrade;
- stable employment;
- disposable income; and
- the length of residence in the subject property.
11
Accordingly, the seller may classify certain home equity loan applications in a
more favorable risk category than other home equity loan applications that, in
the absence of these compensating factors, would satisfy only the criteria of a
less favorable risk category.
SERVICING
The servicer has been servicing loans since March 1997, when it assumed the
default management cycle of loans previously handled by CTX Mortgage Company,
LLC, a seller/servicer of primarily conforming mortgage loans. The servicer or
one of its affiliates originates all of the loans it services, other than those
purchased by it from approved wholesale sources. Servicing encompasses, among
other activities, the following processes: billing and collection of payments
when due, movement and reporting of cash to the payment clearing bank accounts,
customer help, reconveyance, recovery of delinquent installments, instituting
foreclosure and liquidation of the underlying collateral. As of December 31,
2001, the servicer was servicing a portfolio of approximately $4.2 billion. The
servicer is currently ranked "average" as a residential subprime loan servicer
by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
The servicer services all loans in its Dallas, Texas servicing facility
using a mid-range AS-400 based servicing platform, known as LSAMS, for which the
servicer purchased a separate user license in August of 1997. The LSAMS system
is also employed by other large servicers in the subprime and prime mortgage
loan industries. The servicer has purchased an additional servicing system from
London Bridge Corporation, known as FORTRACS. This event-tracking system,
working in tandem with LSAMS, can separately track (i) mortgaged properties in
foreclosure, (ii) borrower bankruptcies and (iii) mortgaged properties acquired
by foreclosure or otherwise in connection with defaulted home equity loans
(commonly referred to as REO property). FORTRACS has generally increased the
servicer's ability to track and monitor loans in the default process.
The servicer's operating and compliance policies and procedures are
published and updated to comply with state and federal legal and regulatory
requirements.
The servicer's default management policy has been designed to identify
collection problems so as to facilitate a prompt response to the delinquent
borrower's situation. Early identification of a significant collection problem
is especially critical in the subprime mortgage environment.
Borrowers are mailed a monthly billing statement approximately two weeks
prior to their payment's scheduled due date. Collection activity on an account
begins as soon as five days after the scheduled due date if a payment is not
made. The servicer uses a custom behavioral risk scoring model to prioritize the
calling of customers in the early stages of delinquency and utilizes a Davox
predictive power dialer to assist with productivity of calls. New loans that do
not perform in accordance with their loan terms are specifically identified for
collection work performed by managers and, if necessary, the originating
operation. Notices and special collection letters are used in the normal
collection processes.
The collection strategy is to determine the facts surrounding the
delinquency, obtain customer agreement for the solution and attempt to preclude
future delinquency on the part of the borrower. Generally, when a promise for
payment is obtained from the borrower by the collector, LSAMS will target the
loan in the "queue" for the date of the promised payment. If the payment is
made, the account is removed from the collection queue. If the arrangement for
payment was not kept, the loan is placed back in the call route for the
collector to contact and follow up on the previous arrangements for payment. If
the payment is received per the arrangements and no future promise or target
dates are noted on LSAMS, the loan will be removed from the collection cycle
unless the account becomes delinquent in the future.
Generally, when a loan appears in the LSAMS default management system, the
collector will telephone the borrower to discuss the past due payment situation.
Standard collection form letters, approved by the servicer's legal department,
are generally utilized in conjunction with telephone calling, in order to reach
the delinquent borrower. Documentation of collection activity is critically
important in the
12
default management process. Collectors have access on LSAMS to borrower
demographics, telephone numbers, loan payment history and all previous
collection notes, to assist in the collection of a past due account. The
servicer's policy requires that managers in the collection department monitor
the collectors' work on LSAMS and offer them appropriate guidance and training.
The servicer's policy is to send out a notice of demand at the 61st day of
delinquencies. This may be done sooner if the circumstances of a particular
account indicate that legal action appears likely. This letter will give the
customer 30 days' notice of the servicer's intent to initiate foreclosure action
on the loan. If an alternative to foreclosure is appropriate, a recommended
course of action will be prescribed by senior servicing management. Servicing
and collection practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the borrower vary from state to state.
Prior to any foreclosure action, and intermittently updated throughout the
process, the servicer performs an in-depth market value analysis on all
defaulted loans. This analysis includes a current appraisal or broker price
opinion of the mortgaged property conducted by an independent vendor from the
servicer's approved network of appraisers or real estate brokers. The servicer
uses the market value analysis to develop its strategy for bidding, repairs, and
sale of the property.
If the servicer acquires title to a property at a foreclosure sale or
through other means, the REO property department immediately begins working on
the file by obtaining at least two local real estate brokers to inspect the
property and provide an estimate of repairs needed and a recommended list price.
Repairs are performed if it is determined that they will increase the net
liquidation proceeds and speed of disposal.
If the property is not vacated when it is acquired, a local attorney will
be hired to commence eviction proceedings. Once it has listed a foreclosed
property, the REO property department will follow up closely with the listing
agent to ensure that the collateral is secure and that it is being aggressively
marketed.
The servicer outsources the tracking and follow-up on homeowners and flood
insurance for home equity loans without escrows. The service provider follows an
established process of sending servicer-approved letters notifying the customer
of non-receipt of proof of insurance renewal. This three-letter process is
supplemented with phone calls made to the homeowner's insurance agent. If proof
of insurance has still not been received following this process, the servicer
will obtain a collateral protection insurance policy on the borrower's behalf
and at the borrower's expense. The servicer has a master policy with the
collateral protection insurance provider, which protects against errors and
omissions with a blanket policy covering the servicer's balance on the loan. For
property taxes on home equity loans without escrows, the servicer obtains tax
service contracts on the loans from a major vendor, which tracks all properties
for the payment of property taxes by the homeowner.
The servicer is currently working with its tax and insurance vendors to
offer full tax and insurance escrow services to its new and existing customers.
These escrow services, which will involve collecting monthly pro-rated tax and
insurance amounts from borrowers and controlling the payments to taxing
authorities and insurers, are expected to be offered to home equity loan
customers during the first calendar quarter of 2002. In addition, the servicer
has established master policies with four private mortgage insurance companies
for the purpose of placing mortgage insurance on selected home equity loans with
loan-to-value ratios greater than 80%.
DESCRIPTION OF THE SECURITIES
GENERAL
Each series of notes will be issued pursuant to an indenture between the
related trust fund and the entity named in the related prospectus supplement as
indenture trustee with respect to the series. In addition, for a series of
notes, a sale and servicing agreement will be entered into among the depositor,
the seller, the servicer, the trust fund and the indenture trustee, and a trust
agreement will be entered into among the depositor, the seller and an owner
trustee. A form of indenture, sale and servicing agreement and trust agreement
have been filed as exhibits to the registration statement of which this
prospectus forms
13
a part. Certificates will be issued in series pursuant to a pooling and
servicing agreement among the depositor, the seller, the servicer and the entity
named in the related prospectus supplement as the trustee. A form of pooling and
servicing agreement has been filed as an exhibit to the registration statement
of which this prospectus forms a part. A series may consist of both notes and
certificates. For purposes of this prospectus, the term "trustee" will be used
to refer to the trustee with respect to a series of certificates or the
indenture trustee with respect to a series of notes. The term "agreement" or
"agreements" will refer to the relevant agreement or agreements in the context
in which the term appears.
The following summaries describe the material provisions in the agreements
common to each series of securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the agreements and the prospectus supplement relating to each
series of securities. Where particular provisions or terms used in the
agreements are referred to, the actual provisions (including definitions of
terms) are incorporated in this prospectus by reference as part of the summaries
contained in this prospectus.
Each series of securities will consist of one or more classes of
securities, one or more of which may be:
- Compound Interest Securities, with respect to which, for a certain
specified period of time, instead of requiring payment of interest, all
or a portion of the accrued interest is capitalized, that is, added to
the principal balance on each distribution date. At the end of this
period, interest payments will be made on a principal balance that
includes the capitalized interest;
- Variable Interest Securities, with respect to which interest accrues at a
rate that is adjusted, based upon a predetermined index, at fixed
periodic intervals, as set forth in the related prospectus supplement;
- Planned Amortization Class Securities, with respect to which payments of
principal are made in accordance with a schedule specified in the related
prospectus supplement, based on certain assumptions stated in the
prospectus supplement;
- Zero Coupon Securities, which are entitled to receive payments of
principal only;
- Principal Only Securities, which are entitled solely or primarily to
distributions of principal and identified as set forth in the prospectus
supplement; or
- Interest Only Securities, which are entitled solely or primarily to
distributions of interest as set forth in the related prospectus
supplement.
A series may also include one or more classes of subordinated securities.
The right to receive principal and/or interest on a subordinated security is
subordinated to the rights of more senior classes to distribution of principal
and/or interest, and the subordinated securities may also be allocated losses
and shortfalls prior to senior classes. Securities may also be issued to
represent a retained interest in the residual value of the trust fund.
The securities of each series will be issued only in fully registered form,
without coupons, in the authorized denominations for each class specified in the
related prospectus supplement. Upon satisfaction of the conditions, if any,
applicable to a class of a series, as described in the related prospectus
supplement, the transfer of the securities may be registered and the securities
may be exchanged at the office of the trustee specified in the prospectus
supplement without the payment of any service charge other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange. If specified in the related prospectus supplement, one or more classes
of a series may be available in book-entry form only.
Payments of principal of and interest on a series of securities will be
made on the distribution dates specified in the related prospectus supplement
(which may be different for each class for the payment of principal and
interest) by check mailed to holders of the securities of the series registered
as holders at the
14
close of business on the record date applicable to the relevant distribution
date, as specified in the related prospectus supplement, at their addresses
appearing on the security register. However, payments may be made by wire
transfer (which, unless otherwise specified in the related prospectus
supplement, will be at the expense of the holder requesting payment by wire
transfer) in certain circumstances described in the related prospectus
supplement. In addition, final payments of principal in retirement of each
security will be made only upon presentation and surrender of the security at
the office of the trustee specified in the prospectus supplement. Notice of the
final payment on a security will be mailed to the holder of the security before
the distribution date on which the final principal payment on any security is
expected to be made to the holder of the security.
Payments of principal of and interest on the securities will be made by the
trustee, or a paying agent on behalf of the trustee, as specified in the related
prospectus supplement. All payments with respect to the home equity loans for a
series, together with reinvestment income on these payments, amounts withdrawn
from any reserve fund and amounts available pursuant to any other credit
enhancement will be deposited into the Certificate Account (in the case of a
series of certificates) or the Distribution Account (in the case of a series of
notes), as specified in the related agreement. If provided in the related
agreement, these amounts may be net of certain amounts payable to the servicer
or other persons specified in the agreement. These net amounts will then be
available to make payments on the securities of the series on the next
applicable distribution date. See "Accounts--Certificate and Distribution
Accounts."
The securities will not represent an interest in or obligation of, and the
home equity loans are not guaranteed by, the depositor, the trustee, the owner
trustee (if applicable), the seller, the servicer or any of their affiliates,
except as described in this prospectus or the accompanying prospectus
supplement.
BOOK-ENTRY SECURITIES
If specified in the related prospectus supplement, one or more classes of
securities may be issued in book-entry form. Persons acquiring beneficial
ownership interests in the book-entry securities will hold their securities
through The Depository Trust Company ("DTC") in the United States, or
Clearstream Banking societe anonyme ("Clearstream, Luxembourg") or the Euroclear
System ("Euroclear") in Europe, if they are participants of those systems, or
indirectly through organizations that are participants in those systems. The
book-entry securities will be issued in one or more certificates which equal the
aggregate principal balance of the applicable class or classes of securities and
will initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank, N.A. will act
as depositary for Clearstream, Luxembourg and Morgan Guaranty Trust Company of
New York will act as depositary for Euroclear. Except as described below, no
person acquiring a book-entry security will be entitled to receive a physical
certificate representing its security.
Unless and until physical certificates representing the securities are
issued, it is anticipated that the only certificateholder or noteholder, as
applicable, will be Cede & Co., as nominee of DTC. Beneficial owners are only
permitted to exercise their rights indirectly through DTC or, in Europe,
Clearstream, Luxembourg and Euroclear, and their participants.
The beneficial owner's ownership of a book-entry security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for this
purpose. In turn, the financial intermediary's ownership of the book-entry
security will be recorded on the records of DTC (or of a participating firm that
acts as agent for the financial intermediary, whose interest will in turn be
recorded on the records of DTC, if the beneficial owner's financial intermediary
is not a DTC participant, and on the records of Clearstream, Luxembourg or
Euroclear, as appropriate).
15
Beneficial owners will receive all distributions of principal of, and
interest on, the book-entry securities from the trustee through DTC and DTC
participants. While the book-entry securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations, DTC is required to make
book-entry transfers among participants on whose behalf it acts with respect to
the securities and is required to receive and transmit distributions of
principal of, and interest on, the securities. Participants and indirect
participants with whom beneficial owners have accounts with respect to
securities are similarly required to make book-entry transfers and receive and
transmit distributions on behalf of their respective beneficial owners.
Accordingly, although beneficial owners will not possess certificates or notes,
the DTC rules provide a mechanism by which beneficial owners will receive
distributions and will be able to transfer their interest.
Beneficial owners will not receive or be entitled to receive physical
certificates representing their respective interests in the securities, except
under the limited circumstances described below. Unless and until physical
certificates are issued, beneficial owners who are not participants may transfer
ownership of securities only through participants and indirect participants by
instructing participants and indirect participants to transfer securities, by
book-entry transfer, through DTC for the account of the purchasers of these
securities, which account must be maintained with their participants. Under the
DTC rules and in accordance with DTC's normal procedures, transfers of ownership
of securities will be executed through DTC and the accounts of the respective
participants at DTC will be debited and credited. Similarly, the participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing beneficial owners.
Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a
participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in securities settled during subsequent securities settlement
processing will be reported to the relevant Euroclear or Clearstream, Luxembourg
participants on that business day. Cash received in Clearstream, Luxembourg or
Euroclear as a result of sales of securities by or through a Clearstream,
Luxembourg participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg participants and Euroclear
participants will occur in accordance with their respective rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the relevant European depositary; however,
these cross market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in that
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver instructions
to the relevant European depositary to take action to effect final settlement on
its behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. Clearstream, Luxembourg participants and Euroclear
participants may not deliver instructions directly to the European depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry securities, whether
held for its own account or as a nominee for another person. In general,
beneficial
16
ownership of book-entry securities will be subject to the rules, regulations and
procedures governing DTC and DTC participants as in effect from time to time.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream, Luxembourg was originally incorporated in
1970 under the name of "Cedel S.A.", a company with limited liability under
Luxembourg law (a societe anonyme). Cedel S.A. subsequently changed its name to
Cedelbank. In January 2000, Cedelbank's parent company, Cedel International,
societe anonyme ("CI"), merged its clearing, settlement and custody business
with that of Deutsche Borse Clearing AG ("DBC"). The merger involved the
transfer by CI of substantially all of its assets and liabilities (including its
shares in Cedelbank) to a new Luxembourg company, New Cedel International,
societe anonyme ("New CI"), which is 50% owned by CI and 50% owned by DBC's
parent company, Deutsche Borse AG. The shareholders of these two entities are
banks, securities dealers and financial institutions. In connection with the
merger, the Board of Directors of New CI decided to rename the companies in the
group to give them a cohesive brand name. The new brand name that was chosen is
"Clearstream". Effective January 14, 2000, New CI was renamed "Clearstream
International, societe anonyme". On January 18, 2000, Cedelbank was renamed
"Clearstream Banking, societe anonyme". In addition, on January 17, 2000, DBC
was renamed "Clearstream Banking AG". As a result, there are now two entities in
the corporate group headed by Clearstream International which share the name
"Clearstream Banking", the entity previously named "Cedelbank" and the entity
previously named "Deutsche Borse Clearing AG".
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg customers through electronic book-entry changes in accounts of
Clearstream, Luxembourg customers, thereby eliminating the need for physical
movement of certificates. Transactions may be settled by Clearstream, Luxembourg
in any of 36 currencies, including United States dollars. Clearstream,
Luxembourg provides to its customers, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg also
deals with domestic securities markets in over 30 countries through established
depositary and custodial relationships. Clearstream, Luxembourg is registered as
a bank in Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are worldwide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to banks and securities brokers and dealers. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Euroclear Bank S.A./ N.V. as the operator of Euroclear (the "Euroclear
Operator") in Brussels to facilitate settlement of trades between Clearstream,
Luxembourg and the Euroclear Operator.
Euroclear was created in 1968 to hold securities for its participants and
to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thus eliminating
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of the Euroclear Operator, under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation. All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not Euroclear Clearance Systems S.C. Euroclear
Clearance Systems S.C. establishes policy for Euroclear on behalf of Euroclear
participants. Euroclear participants include banks (including central banks),
securities brokers and dealers and other professional
17
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
The Euroclear Operator has a banking license from the Belgian Banking and
Finance Commission. This license authorizes the Euroclear Operator to carry out
banking activities on a global basis.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law.
These Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear Operator acts under these
Terms and Conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
Distributions on the book-entry securities will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of these payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing these payments to the beneficial owners that it
represents and to each financial intermediary for which it acts as agent. Each
financial intermediary will be responsible for disbursing funds to the
beneficial owners that it represents.
Under a book-entry format, beneficial owners may experience some delay in
their receipt of payments, since these payments will be forwarded by the trustee
to Cede & Co. Distributions with respect to securities held through Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg participants or Euroclear participants in accordance with the
relevant system's rules and procedures, to the extent received by the relevant
European depositary. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC can
only act on behalf of financial intermediaries, the ability of a beneficial
owner to pledge book-entry securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of the
book-entry securities, may be limited due to the lack of physical certificates
for book-entry securities. In addition, issuance of the book-entry securities in
book-entry form may reduce the liquidity of the securities in the secondary
market since certain potential investors may be unwilling to purchase securities
for which they cannot obtain physical certificates.
Monthly and annual reports on the applicable trust fund will be provided to
Cede & Co., as nominee of DTC, and may be made available by Cede & Co. to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting DTC, and to the financial intermediaries to
whose DTC accounts the book-entry securities of the beneficial owners are
credited.
DTC has advised the trustee that, unless and until physical certificates
representing the securities are issued, DTC will take any action permitted to be
taken by the holders of the book-entry securities under the relevant agreement
only at the direction of one or more financial intermediaries to whose DTC
accounts the book-entry securities are credited, to the extent that these
actions are taken on behalf of financial intermediaries whose holdings include
the book-entry securities. Clearstream, Luxembourg or the Euroclear operator, as
the case may be, will take any other action permitted to be taken by a holder
under the relevant operating agreement on behalf of a Clearstream, Luxembourg
participant or Euroclear participant only in accordance with its relevant rules
and procedures and subject to the ability of the relevant European depositary to
effect these actions on its behalf through DTC. DTC may take actions, at the
direction of the related participants, with respect to some securities which
conflict with actions taken with respect to other securities.
18
Physical certificates representing the securities of a series will be
issued to beneficial owners, or their nominees, rather than to DTC, only if:
- DTC or the depositor advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as nominee and
depository with respect to the book-entry securities and the seller or
the trustee is unable to locate a qualified successor;
- the depositor, at its sole option, elects to terminate a book-entry
system through DTC, and the seller does not select a successor
depository; or
- after the occurrence of a servicer termination event or an event of
default, the beneficial owners of each class of the series of securities
representing percentage interests aggregating at least 51% of such class
advise the trustee and DTC through the financial intermediaries and the
DTC participants in writing that the continuation of a book-entry system
through DTC (or its successor) is no longer in the best interests of
beneficial owners. We refer you to "The Agreements--Removal and
Resignation of Servicer" and "-- Optional Termination--Events of Default;
Termination Under Indenture" for a discussion of what constitutes a
servicer termination event and an event of default.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all applicable
beneficial owners of the occurrence of the event and the availability through
DTC of physical certificates. Upon surrender by DTC of the global certificate or
certificates representing the book-entry securities and instructions for
re-registration, the trustee will issue physical certificates representing the
securities, and thereafter the trustee will recognize the holders of the
physical certificates as certificateholders or noteholders, as applicable, under
the applicable agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures, and these
procedures may be discontinued at any time.
Neither the depositor, the seller, the servicer, the owner trustee (if
applicable), the trustee or any of their affiliates will have any responsibility
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of the book-entry securities held by Cede & Co.,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to these beneficial ownership interests.
VALUATION OF THE HOME EQUITY LOANS
If specified in the related prospectus supplement for a series of
certificates or notes, each home equity loan included in the related trust fund
for a series will be assigned an initial "asset value." Generally, the related
agreement will specify that at any time the asset value of the home equity loans
will be equal to the product of the asset value percentage as set forth in the
related agreement and the lesser of:
- the stream of remaining regularly scheduled payments on the home equity
loans, net of certain amounts payable as expenses, together with income
earned on each scheduled payment received through the day preceding the
next distribution date at the "assumed reinvestment rate," if any,
discounted to present value at the highest interest rate on the
certificates or notes of the series over periods equal to the interval
between payments on the certificates or notes; and
- the then principal balance of the home equity loans.
Generally, the related agreement will specify that the initial asset value
of the home equity loans will be at least equal to the principal amount of the
certificates or notes of the related series at the date of issuance.
The assumed reinvestment rate, if any, for a series will be the highest
rate permitted by the relevant rating agency or a rate insured by means of a
surety bond, guaranteed investment contract or other
19
arrangement satisfactory to the rating agency. If the assumed reinvestment rate
is insured in this manner, the related prospectus supplement will set forth the
terms of the relevant insurance arrangement.
PAYMENTS OF INTEREST
The securities of each class by their terms entitled to receive interest
will bear interest (which is generally calculated on the basis of a 360 day year
of twelve 30-day months) from the date and at the rate per annum specified, or
calculated in the method described, in the related prospectus supplement.
Interest on these securities will be payable on the distribution date specified
in the related prospectus supplement. If so specified in the related prospectus
supplement, the distribution date for the payment of interest of a class may be
different from, or occur more or less frequently than, the distribution date for
the payment of principal with respect to the class. The rate of interest on
securities of a series may be variable or may change with changes in the annual
percentage rates of the home equity loans included in the related trust fund
and/or as prepayments occur with respect to these home equity loans. Principal
Only Securities may not be entitled to receive any interest distributions or may
be entitled to receive only nominal interest distributions. Any interest on Zero
Coupon Securities that is not paid on the related distribution date will accrue
and be added to principal on the related distribution date.
Interest payable on the securities on a distribution date will include all
interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding the distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date, principal payments will be made to the holders
of securities on which principal is then payable, to the extent set forth in the
related prospectus supplement. These payments will be made in an aggregate
amount determined as specified in the related prospectus supplement and will be
allocated among the relevant classes in the manner, at the times and in the
priority set forth in the prospectus supplement. The holders of one or more
classes of securities may have the right to request that principal distributions
allocable to the applicable class of securities be distributed directly to the
holder. If the requests of holders exceed the amount of principal to be
distributed, the requests generally will be filled in the order in which they
were received. If the amount of principal to be distributed exceeds the amount
of requests, the trustee will select random lots of $1,000 each to receive the
relevant principal distribution. Thus, some holders of the applicable class of
securities may receive no principal distributions or a disproportionate amount
of principal distributions. If specified in the related prospectus supplement,
the distribution date for the payment of principal of a class may be different
from, or occur more or less frequently than, the distribution date for the
payment of interest for the class.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date with respect to each class of notes
is the date no later than the date on which principal will be fully paid. The
prospectus supplement may use the term "final payment date" or "final maturity
date" to refer to the final scheduled distribution date with respect to a class
of notes. With respect to each class of certificates, the final scheduled
distribution date will be the date on which the entire aggregate principal
balance is expected to be reduced to zero, in each case calculated on the basis
of the assumptions applicable to the relevant series described in the related
prospectus supplement. The final scheduled distribution date for each class of a
series will be specified in the related prospectus supplement. Since payments on
the home equity loans will be used to make distributions in reduction of the
outstanding principal amount of the securities, it is likely that the actual
final distribution date of a class will occur earlier, and may occur
substantially earlier, than its final scheduled distribution date. Furthermore,
with respect to a series of certificates, as a result of delinquencies, defaults
and liquidations of the home equity loans in the trust fund, the actual final
distribution date of any certificate
20
may occur later than its final scheduled distribution date. No assurance can be
given as to the actual prepayment experience with respect to a series. See
"--Weighted Average Life of the Securities" below.
SPECIAL REDEMPTION
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
securities of the series may be subject to special redemption, in whole or in
part, on a special redemption date specified in the related prospectus
supplement if, as a consequence of prepayments on the home equity loans relating
to the securities or low yields then available for reinvestment, the entity
specified in the related prospectus supplement determines, based on assumptions
specified in the applicable agreement, that the amount available for the payment
of interest that will have accrued on the securities through the designated
interest accrual date specified in the related prospectus supplement is less
than the amount of interest that will have accrued on the securities. In this
event and as further described in the related prospectus supplement, the trustee
will redeem a principal amount of outstanding securities of the series as will
cause the amount available for payment of interest to equal the amount of
interest that will have accrued through the designated interest accrual date for
the series outstanding immediately after the special redemption has occurred.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of the
security will be repaid to the investor. Generally, the weighted average life of
a class of securities will be influenced by the rate at which the amount
financed under the home equity loans included in the trust fund for a series is
paid, which may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The prospectus supplement for a series of
securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the weighted average life of each class of
securities, and the percentage of the original principal amount of each class of
securities that would be outstanding on specified distribution dates for the
series, in each case based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the home equity loans
included in the related trust fund are made at rates corresponding to various
percentages of the prepayment standard or model specified in the prospectus
supplement.
There is, however, no assurance that prepayment of the home equity loans
included in the related trust fund will conform to any level of any prepayment
standard or model specified in the related prospectus supplement. The rate of
principal prepayments on pools of loans may be influenced by a variety of
factors, including job related factors such as transfers, layoffs or promotions
and personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments and servicing decisions also
affect the rate of principal prepayments. As a result, there can be no assurance
as to the rate or timing of principal prepayments of the home equity loans
either from time to time or over the lives of the home equity loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the home equity
loans for a series, the loans are likely to prepay at rates higher than if
prevailing interest rates remain at or above the interest rates borne by the
loans. In this regard, it should be noted that the home equity loans for a
series may have different interest rates. In addition, the weighted average life
of the securities may be affected by the varying maturities of the home equity
loans. If any home equity loans for a series have actual terms-to-stated
maturity of less than those assumed in
21
calculating the final scheduled distribution date of the related securities, one
or more classes of the series may be fully paid prior to their respective final
scheduled distribution date, even in the absence of prepayments and a
reinvestment return higher than the assumed reinvestment rate for the series.
RATINGS
Any class of securities issued under this prospectus and the related
prospectus supplement may be rated by one or more of Standard & Poor's, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service, Inc. or
Fitch Ratings or other rating agencies, as specified in the related prospectus
supplement. Any such rating will be based on, among other things, the adequacy
of the value of the assets of the related trust fund and any credit enhancement
with respect to the class of securities, and will reflect the rating agency's
assessment solely of the likelihood that holders of the class of securities will
receive payments to which the holders are entitled under the related agreement.
The rating will not constitute an assessment of the likelihood that principal
prepayments on the related home equity loans will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the series of securities. The
ratings should not be deemed a recommendation to purchase, hold or sell the
securities, because they do not address market price or suitability for a
particular investor. Each security rating should be evaluated independently of
any other security rating.
There is also no assurance that any security rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn entirely
by the rating agency in the future if in its judgment circumstances in the
future so warrant.
THE TRUST FUNDS
GENERAL
The notes of each series will be secured by the pledge of the assets of the
related trust fund, and the certificates of each series will represent interests
in the assets of the related trust fund. The trust fund of each series will
include:
- the home equity loans;
- amounts available from the reinvestment of payments on the home equity
loans at the assumed reinvestment rate, if any, specified in the related
prospectus supplement;
- any credit enhancement or the rights to any credit enhancement;
- any mortgaged property that secured a home equity loan but which is
acquired by foreclosure or deed in lieu of foreclosure or repossession so
as to become an REO property; and
- the amount, if any, initially deposited in the Prefunding Account,
Capitalized Interest Account, Principal and Interest Account, Certificate
Account or Distribution Account for a series as specified in the related
prospectus supplement.
The securities will be non-recourse obligations of the related trust fund.
The assets of the trust fund specified in the related prospectus supplement for
a series or class of securities will serve as collateral only for that series or
class of securities unless the related prospectus supplement specifies that the
assets will serve as collateral for another series or class. Holders of a series
or class of notes, as applicable, may only proceed against the collateral
securing their series or class of notes in the case of a default with respect to
their series or class of notes and may not proceed against any assets of the
depositor, the seller or the servicer or the related trust fund not pledged to
secure their notes.
The home equity loans for a series will be transferred by the seller to the
depositor and from the depositor to the trust fund. Home equity loans relating
to a series will be master serviced by the servicer pursuant to the related
agreement.
22
If specified in the related prospectus supplement, a trust fund relating to
a series of securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement between the seller and the trustee of the trust fund specified in the
related prospectus supplement.
With respect to each trust fund, prior to the initial offering of the
related series of securities, the trust fund will have no assets or liabilities.
No trust fund is expected to engage in any activities other than acquiring,
managing and holding the related home equity loans and other assets contemplated
in this prospectus and in the related prospectus supplement and proceeds of the
assets, issuing securities, making payments and distributions on the securities
and certain related activities. No trust fund is expected to have any source of
capital other than its assets and any related credit enhancement.
An agreement may provide that additional home equity loans may be added to
the trust fund if:
- the home equity loans were originated or acquired by the seller in the
ordinary course of its business;
- the inclusion of the home equity loans will maintain or increase the
level of overcollateralization; and
- the inclusion of the home equity loans will not result in the withdrawal
or downgrading of the ratings then assigned to the series.
In addition, an agreement may provide that home equity loans may be removed from
a trust fund from time to time if the actual level of overcollateralization
exceeds the amount of overcollateralization required to be maintained and
removal will not result in the withdrawal or downgrading of the ratings then
assigned to the securities of the related series.
THE HOME EQUITY LOANS
The home equity loans for a series may consist, in whole or in part, of
closed-end home equity loans secured by first or second mortgages primarily on
one-to four-family residential properties. The home equity loans may have fixed
interest rates or adjustable interest rates and may provide for other payment
characteristics as described below.
The full principal amount of a home equity loan is advanced at origination
of the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize the loan at its stated
maturity. As more fully described in the related prospectus supplement, interest
on each home equity loan is calculated on the basis of the outstanding principal
balance of the loan multiplied by the applicable home equity loan interest rate
and, in the case of simple interest loans, further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator is the number of days
in the annual period for which interest accrues on the loan. Interest on home
equity loans also may be calculated on an actuarial basis, in which case each
monthly payment consists of a decreasing amount of interest and an increasing
amount of principal, and the payment either earlier or later then the due date
for each payment will not affect the relative applications of principal and
interest. The home equity loans for a series may include home equity loans that
do not amortize their entire principal balance by their stated maturity in
accordance with their terms, and require a balloon payment of the remaining
principal balance at maturity, as specified in the related prospectus
supplement. The original terms to stated maturity of home equity loans will
generally not exceed 360 months.
The mortgaged properties will include single family property, which
consists of one- to four-family attached or detached residential housing,
including condominium units and cooperative dwellings, and may include mixed-use
property. A condominium unit is an individual housing unit in a multi-unit
building, buildings or group of buildings (whether or not attached to each
other), with respect to which the owner has exclusive ownership and possession,
and also includes the owner's individual interest in all common
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areas of the building or buildings. By contrast, a cooperative dwelling is an
individual housing unit owned by a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership securities in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units and which is described in Section 216
of the Code (as defined under "Federal Income Tax Consequences" in this
prospectus). Mixed-use properties may consist of structures of no more than
three stories, which include one to four residential dwelling units and space
used for retail, professional or other commercial uses. These uses, which may
not involve more than 50% of the space in the structure, may include doctor,
dentist or law offices, real estate agencies, boutiques, newsstands, convenience
stores or other similar types of uses intended to cater to individual customers
as specified in the related prospectus supplement. The properties may be located
in suburban or metropolitan districts. Any non-residential use must be in
compliance with local zoning laws and regulations.
The mortgaged properties may consist of detached individual dwellings,
individual condominiums, townhouses, duplexes, row houses, individual units in
planned unit developments and other attached dwelling units. The mortgaged
properties also may include module or manufactured homes which are treated as
real estate under local law. Except for condominium units and cooperative
dwellings, each single family property must be located on land owned in fee
simple by the borrower or on land leased by the borrower for a term at least as
long as the term of the related home equity loan. Attached dwellings may include
owner-occupied structures where each borrower owns the land upon which the unit
is built, with the remaining adjacent land owned in common, or dwelling units
subject to a proprietary lease or occupancy agreement in a cooperatively owned
apartment building. Mortgages on cooperative dwellings consist of a lien on the
shares issued by the cooperative dwelling and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate principal balance of home equity loans secured by mortgaged
properties that are owner-occupied will be disclosed in the related prospectus
supplement. The sole basis for determining that a given percentage of the home
equity loans are secured by single family property that is owner-occupied will
be either (1) the making of an oral representation by the mortgagor at
origination of the home equity loan either that the underlying mortgaged
property will be used by the mortgagor for a period of at least six months every
year or that the mortgagor intends to use the mortgaged property as a primary
residence, or (2) a finding that the address of the underlying mortgaged
property is the mortgagor's mailing address as reflected in the servicer's or
the applicable sub-servicer's records. The mortgaged properties also may include
non-owner occupied investment properties and vacation and second homes.
ADDITIONAL INFORMATION ABOUT THE HOME EQUITY LOANS
The related prospectus supplement for each series will provide information
with respect to the home equity loans that are home equity loans as of a
statistical calculation date specified in the prospectus supplement. This
information will include, among other things, and to the extent relevant:
- the aggregate unpaid principal balance of the home equity loans;
- the range of interest rates, and the weighted average interest rate, on
the home equity loans, and, in the case of adjustable rate home equity
loans, the range and weighted average of the current home equity loan
interest rates and any lifetime rate caps;
- the range of the outstanding principal balances, and the average
outstanding principal balance, of the home equity loans;
- the weighted average original and remaining term-to-stated maturity of
the home equity loans and the range of original and remaining
terms-to-stated maturity, if applicable;
- the range and weighted average of "combined loan-to-value ratios"
(defined below) for the home equity loans;
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- the percentage (by outstanding principal balance as of the statistical
calculation date) of home equity loans that accrue interest at adjustable
or fixed interest rates;
- any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the home equity loans;
- the geographic distribution of the mortgaged properties securing the home
equity loans;
- the percentage of home equity loans (by principal balance as of the
statistical calculation date) that are secured by single family
properties, shares relating to cooperative dwellings, condominium units,
investment property and vacation or second homes;
- the lien priority of the home equity loans; and
- the delinquency status and year of origination of the home equity loans.
The related prospectus supplement will also specify any other limitations
on the types or characteristics of home equity loans for a series. The
characteristics of the home equity loans for a series as of the cut-off date
established for the assignment of the home equity loans to the trust fund may
differ from the characteristics presented in the prospectus supplement as of the
statistical calculation date. However, the depositor does not believe that the
home equity loans as they will be constituted on the cut-off date will deviate
in any material respect from the home equity loan pool characteristics that are
described in the prospectus supplement.
The "combined loan-to-value ratio" of a home equity loan is the percentage
equivalent of a fraction, the numerator of which is the sum of (1) the original
principal amount of the home equity loan at its date of origination and (2) the
outstanding principal amount of any senior loan on the mortgaged property at the
time of origination of the home equity loan, and the denominator of which is the
"appraised value" (defined below) of the mortgaged property at the date of
origination.
"Appraised value" means, with respect to property securing a home equity
loan, the lesser of the appraised value determined in an appraisal obtained at
origination of the home equity loan or sales price of the property at that time.
If information of the nature described above about the home equity loans is
not known to the seller at the time the securities are initially offered,
approximate or more general information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related series and to be filed with the SEC within 15 days
after the initial issuance of the securities.
ACCOUNTS
CERTIFICATE AND DISTRIBUTION ACCOUNTS
A separate Principal and Interest Account will be established for each
series of securities for receipt of all amounts received on or with respect to
the home equity loans. Certain amounts on deposit in the Principal and Interest
Account and certain amounts available pursuant to any credit enhancement, as
provided in the related prospectus supplement, will be deposited into one or
more Certificate Accounts (in the case of a series of certificates) or
Distribution Accounts (in the case of a series of notes). Funds in these
accounts generally will be invested in eligible investments maturing, with
certain exceptions, not later, in the case of funds in the Principal and
Interest Account, than the day preceding the date the funds are due to be
deposited in the Certificate or Distribution Account or otherwise distributed
and, in the case of funds in the Certificate or Distribution Account, than the
day preceding the next distribution date for the related series of securities.
For purposes of this prospectus, the term "Certificate Account" may be used in
place of "Distribution Account."
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We refer you to "--Eligible Investments" and "The Agreements--Deposits to
Principal and Interest Account and Certificate Account" below for more detail.
PREFUNDING AND CAPITALIZED INTEREST ACCOUNTS
If specified in the related prospectus supplement, a trust fund will
include one or more Prefunding Accounts, that are segregated trust accounts
established and maintained with the trustee for the related series. If so
specified, on the closing date for the series, a prefunded amount representing a
portion of the proceeds of the sale of the securities limited to 50% of the
aggregate principal amount of the series may be deposited in the Prefunding
Account and may be used to purchase additional home equity loans during a
prefunding period, not to exceed six months, specified in the related prospectus
supplement. Pending the purchase of additional home equity loans, funds
deposited in the Prefunding Account will be invested in eligible investments. If
any prefunded amount remains on deposit in the Prefunding Account at the end of
the prefunding period, this amount will be applied in the manner specified in
the related prospectus supplement to prepay the notes or the certificates of the
applicable series.
Each additional home equity loan must satisfy the eligibility criteria
specified in the related prospectus supplement and related agreements. This
eligibility criteria will be determined in consultation with the relevant rating
agencies and any credit enhancer prior to the issuance of the related series and
are designed to ensure that if the additional home equity loans were included as
part of the initial home equity loans, the credit quality of the assets as a
whole would continue to be consistent with the initial rating on the securities.
The eligibility criteria will apply to the aggregate pool of home equity loans,
including the original and the additional home equity loans, and must include a
minimum weighted average interest rate, a maximum weighted average remaining
term to maturity and a maximum weighted average combined loan-to-value ratio.
Depending on the composition of the original home equity loans and the type of
credit enhancement, additional eligibility criteria, such as a minimum interest
rate, a maximum principal balance, a limitation on geographic concentration and
a limit on certain types of home equity loans such as balloon loans or loans
secured by other than primary residences, may need to be satisfied. The seller
will certify to the trustee that all conditions precedent to the transfer of the
additional home equity loans, including the satisfaction of the eligibility
criteria applicable to the trust fund, have been satisfied. It is a condition to
the transfer of any additional home equity loans to the trust fund that no
rating agency, after receiving prior notice of the proposed transfer of the
additional home equity loans to the trust fund, advises the seller or the
trustee or any credit enhancer that the conveyance of the additional home equity
loans will result in a qualification, modification or withdrawal of its then
current rating of any class of notes or certificates of the series. Following
the transfer of additional home equity loans to the trust fund, the aggregate
characteristics of the home equity loans then held in the trust fund may vary
from those of the initial home equity loans. As a result, the additional home
equity loans may adversely affect the performance of the related securities.
If a Prefunding Account is established, one or more Capitalized Interest
Accounts, which must be segregated trust accounts, may be established and
maintained with the trustee for the related series. On the relevant closing
date, a portion of the proceeds of the sale of the securities will be deposited
in the Capitalized Interest Account and used to pay interest accrued on the
securities and, if specified in the related prospectus supplement, certain fees
or expenses (such as trustee fees and credit enhancement fees) that are not
covered by interest generated by the home equity loans in the trust fund during
the prefunding period and available to pay these amounts. If specified in the
related prospectus supplement, amounts on deposit in the Capitalized Interest
Account may be released to the seller prior to the end of the prefunding period
subject to the satisfaction of certain tests specified in the related prospectus
supplement. Any amounts on deposit in the Capitalized Interest Account at the
end of the prefunding period will be distributed to the person specified in the
related prospectus supplement.
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ELIGIBLE INVESTMENTS
Each agreement generally will define eligible investments to include the
following (if the rating agencies that rate the relevant series of securities do
not include Standard & Poor's or Moody's, the ratings referred to below will
instead refer to the equivalent ratings of any other rating agency that rates
the series):
- direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency or
instrumentality of the United States, if these obligations are backed by
the full faith and credit of the United States;
- repurchase agreements with a term of 30 days or less collateralized by
obligations specified in the subparagraph above, if the unsecured
short-term or long-term debt obligations of the party agreeing to
repurchase these obligations are rated "A-1+" or "AA" (or better),
respectively, by Standard & Poor's and "P-1" or "Aa2" (or better),
respectively, by Moody's;
- federal funds, certificates of deposit, time deposits and bankers'
acceptances of any domestic bank, if the unsecured short-term debt
obligations of the bank have been rated by each of Standard & Poor's and
Moody's in its highest unsecured short-term debt rating category;
- commercial paper (having original maturities of not more than 270 days)
which has been rated by each of Standard & Poor's and Moody's in its
highest unsecured short-term debt rating category;
- interests in any money market fund which has a rating of either "AAAm" or
"AAAm-G" by Standard & Poor's and "Aaa" by Moody's; and
- deposits of any bank or savings and loan association which has a
long-term deposit rating of "BBB" or better by Standard & Poor's and "A2"
or better by Moody's and has combined capital, surplus and undivided
profits of at least $50,000,000.
However, no instrument described above may evidence either the right to
receive (1) only interest with respect to the obligations underlying the
instrument or (2) both principal and interest payments derived from obligations
underlying the instrument and the interest and principal payments with respect
to the instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations. In addition, no
instrument may be purchased at a price greater than par if the instrument may be
prepaid or called at a price less than its purchase price prior to its stated
maturity.
To the extent any investment would require registration of the trust fund
as an investment company, that investment will not constitute an eligible
investment.
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related prospectus supplement so provides, there may be a revolving
period commencing on the date of issuance of a class or classes of notes or
certificates of a series and ending on the date set forth in the prospectus
supplement during which limited or no principal payments will be made to one or
more classes of notes or certificates of the related series identified in the
prospectus supplement. Some or all collections of principal otherwise allocated
to these classes of notes or certificates may be:
- utilized during the revolving period to acquire additional home equity
loans which satisfy the criteria specified above and the criteria set
forth in the related prospectus supplement;
- held in an account and invested in eligible investments for later
distribution to holders;
- applied to those notes or certificates, if any, specified in the related
prospectus supplement that are in amortization; or
- otherwise applied as specified in the related prospectus supplement.
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An amortization period is a period during which an amount of principal is
payable to holders of a series which, during the revolving period, were not
entitled to payments of principal. If specified in the related prospectus
supplement, during an amortization period all or a portion of principal
collections on the home equity loans may be applied as specified above for a
revolving period and, to the extent not so applied, will be distributed to the
classes of notes or certificates specified in the related prospectus supplement
as then being entitled to payments of principal. In addition, if specified in
the related prospectus supplement, amounts deposited in certain accounts for the
benefit of one or more classes of notes or certificates may be released from
time to time or on a specified date and applied as a payment of principal on
those classes of notes or certificates. The related prospectus supplement will
set forth the circumstances which will result in the commencement of an
amortization period.
Each series which has a revolving period may also issue to the depositor or
one of its affiliates a retained interest security, which is an undivided
beneficial interest in the series not represented by the other securities issued
by the depositor. As further described in the related prospectus supplement, the
value of the retained interest security will fluctuate as the outstanding amount
of notes and certificates of the related series is reduced.
ENHANCEMENT
The amounts and types of credit enhancement arrangements and the provider
of the credit enhancement, if applicable, with respect to a series or any class
of securities will be set forth in the related prospectus supplement. If
specified in the related prospectus supplement, credit enhancement for any
series of securities may cover one or more classes of notes or certificates, and
accordingly may be exhausted for the benefit of a particular class of notes or
certificates and afterwards be unavailable to other classes of notes or
certificates. Further information regarding any provider of credit enhancement,
including financial information when material, will be included in the related
prospectus supplement.
To the extent provided in the related prospectus supplement, credit
enhancement may include one or more of the following:
- a financial guaranty insurance policy, which will be issued by a monoline
insurance company and which, subject to the terms of the policy, will
guarantee timely payment of interest on, and ultimate (as opposed to
timely) payment of principal of, the applicable class or classes of
securities;
- overcollateralization, which will equal the excess of the aggregate
principal balance of the home equity loans over the aggregate principal
balance of the securities. Overcollateralization may be created by the
initial or subsequent deposit of home equity loans or may build over time
from the application of certain excess cash amounts generated by the home
equity loans to accelerate the amortization of the applicable class or
classes of securities;
- a letter of credit, which will be issued by a bank or other financial
institution in a maximum amount which may be permanently reduced as draws
are made or may be replenished as previous draws are repaid from certain
excess cash amounts generated by the home equity loans. Draws may be made
to cover shortfalls generally in collections, with respect to particular
types of shortfalls such as those due to particular types of losses or
with respect to specific situations such as shortfalls in amounts
necessary to pay current interest;
- a cash reserve fund, which may be partially or fully funded on the date
of issuance or may be funded over time from certain excess cash amounts
generated by the home equity loans. Withdrawals may be made in
circumstances similar to those for which draws may be made on a letter of
credit;
- insurance policies, such as mortgage insurance, hazard insurance and
other insurance policies, which may insure a portion of the home equity
loans against credit losses, bankruptcy losses, fraud losses or special
hazard losses not covered by typical homeowners insurance policies;
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- subordinated securities, which will be subordinated in the right to
receive distributions to one or more other classes of more senior
securities of the same series, some or all of which may themselves be
subordinated to other classes in the series. Subordination may be with
respect to distributions of interest, principal or both. In addition, all
or portions of certain types of losses on the home equity loans may be
allocated to one or more classes of subordinate securities prior to their
allocation to other classes of more senior securities in the applicable
series; or
- derivative products, which may include a swap to convert floating or
fixed rate payments, as applicable, on the home equity loans into fixed
or floating rate payments, as applicable, on the securities or a cap or
floor agreement intended to provide protection against changes in
floating rates of interest payable on the home equity loans and/or the
securities.
The presence of credit enhancement is intended to increase the likelihood
of receipt by the holders of securities of the full amount of principal and
interest due on their securities and to decrease the likelihood that the holders
will experience losses, or may be structured to provide protection against
changes in interest rates or against other risks, such as basis risk and
liquidity risk, to the extent and under the conditions specified in the related
prospectus supplement. Forms of credit enhancement may provide for one or more
classes of securities to be paid in foreign currencies. The credit enhancement
for a class of securities generally will not provide protection against all
risks of loss and may not guarantee repayment of all principal and interest on
the securities. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement, holders will
bear their allocable share of deficiencies. In addition, if a form of credit
enhancement covers more than one class of securities of a series, holders of one
class will be subject to the risk that the credit enhancement will be exhausted
by the claims of holders of other classes.
THE AGREEMENTS
The provisions of the applicable pooling and servicing agreement, trust
agreement, sale and servicing agreement and indenture will vary depending on the
nature of the securities to be issued thereunder and the nature of the related
trust fund. The following summaries describe the material provisions of the
agreements common to each series of securities. The summaries do not purport to
be complete and are subject to, and qualified in their entirety by reference to,
the provisions of the agreements and the prospectus supplement relating to each
series of securities. Where particular provisions or terms used in the
agreements are referred to, the actual provisions (including definitions of
terms) are incorporated in this prospectus by reference as part of the summaries
contained in this prospectus.
GENERAL
At the time of issuance of the securities of a series, the seller will
transfer, convey and assign to the depositor and the depositor will transfer,
convey and assign to the trust fund all right, title and interest of the seller
and the depositor in the home equity loans and other property to be transferred
to the depositor and the trust fund for that series. The assignment will include
all principal and interest due or received on or with respect to the home equity
loans after the cut-off date to the extent specified in the related prospectus
supplement (except for any retained interests). The trustee will, concurrently
with the assignment, execute and deliver the securities.
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING HOME EQUITY LOANS
Under the applicable agreement, as of the closing date for a series of
securities, the seller will make certain representations and warranties about
the home equity loans transferred by it to the depositor, and the servicer will
make certain representations and warranties about any home equity loans
transferred to the depositor by affiliates of the seller. Pursuant to the
related agreement, upon the discovery by the depositor, the seller, the credit
enhancer, if any, the servicer, any sub-servicer, any holder, the custodian for
the home equity loans or the trustee that the representations and warranties of
the seller or the servicer
29
about the home equity loans are untrue in any material respect as of the closing
date, with the result that the interests of the holders or of the credit
enhancer are materially and adversely affected, the party discovering the breach
is required to give prompt written notice to the other parties.
Upon the earlier of the seller's discovery, or its receipt from any of the
other parties of notice, of breach of a representation or warranty with respect
to a home equity loan or the time that an existing untrue statement results in a
situation that materially and adversely affects the interests of the holders or
the credit enhancer, if any, in the home equity loan, the seller will be
required promptly to cure the breach in all material respects or the seller
will, on or prior to the second Monthly Remittance Date (defined under "Deposits
to Principal and Interest Account and Certificate Account" below) immediately
succeeding the discovery, receipt of notice or applicable time:
- substitute each home equity loan which has given rise to the requirement
for action by the seller with a "Qualified Replacement Mortgage" (as
defined in the related agreement) and deliver an amount equal to the
applicable Substitution Amount (defined below) to the trustee, to be
deemed part of the collections remitted by the servicer on the applicable
Monthly Remittance Date; or
- purchase the home equity loan from the trust at a purchase price equal to
the applicable Loan Purchase Price (defined below), which will be
delivered to the trustee along with the Monthly Remittance Amount
(defined under "Deposits to Principal and Interest Account and
Certificate Account" below) remitted by the servicer on the applicable
Monthly Remittance Date.
Despite any contradictory provision of the related agreement, if a REMIC
election is made with respect to the trust fund, no repurchase or substitution
of any home equity loan not in default or as to which no default is imminent may
be made unless the seller obtains for the trustee and any credit enhancer an
opinion of counsel experienced in federal income tax matters stating that a
repurchase or substitution of this kind would not constitute a "prohibited
transaction" (within the meaning of ERISA and the Code) for the REMIC or
otherwise subject the REMIC to tax and would not jeopardize the status of the
REMIC as such (a "REMIC Opinion"), addressed and acceptable to the trustee and
any credit enhancer. The seller will also deliver an officer's certificate to
the trustee and any credit enhancer concurrently with the delivery of a
Qualified Replacement Mortgage stating that the home equity loan meets the
requirements of a Qualified Replacement Mortgage and that all other conditions
to substitution of the Qualified Replacement Mortgage have been satisfied.
Any home equity loan as to which repurchase or substitution was delayed
pursuant to the related agreement will be repurchased or substituted for
(subject to compliance with the provisions of the related agreement) upon the
earlier of the occurrence of a default or imminent default with respect to the
home equity loan and receipt by the trustee and the credit enhancer, if any, of
a REMIC Opinion.
The obligation of the seller to so substitute or repurchase any home equity
loan as to which a representation or warranty is untrue in any material respect
and has not been remedied constitutes the sole remedy available to the holders
and the trustee.
"Loan Purchase Price" means an amount equal to the outstanding principal
balance of a home equity loan as of the date of purchase (assuming that the
Monthly Remittance Amount remitted by the servicer on the applicable Monthly
Remittance Date has already been remitted), plus all accrued and unpaid interest
on the home equity loan at the coupon rate to but not including the date of
purchase together with (without duplication) the aggregate amount of (1) all
unreimbursed Delinquency Advances and Servicing Advances already made with
respect to the home equity loan, (2) all Delinquency Advances which the servicer
has so far failed to remit with respect to the home equity loan and (3) all
reimbursed Delinquency Advances and Servicing Advances to the extent that the
reimbursement is not made from the mortgagor.
"Substitution Amount" means an amount equal to (1) the excess, if any, of
the outstanding principal balance of the home equity loan being replaced over
the outstanding principal balance of the replacement home equity loan, plus (2)
the aggregate amount of all unreimbursed Delinquency Advances and
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unreimbursed Servicing Advances made, and all accrued and unpaid interest, with
respect to the home equity loan being replaced.
See "--Advances; Compensating Interest" for a definition of what
constitutes a "Delinquency Advance" and a "Servicing Advance".
We refer you to "FEDERAL INCOME TAX CONSEQUENCES" and "ERISA
CONSIDERATIONS" for a more detailed discussion of federal income tax and ERISA
implications.
ASSIGNMENT OF HOME EQUITY LOANS
Pursuant to the related agreement, the seller will transfer, assign, set
over and otherwise convey without recourse to the depositor and the depositor
will transfer, assign, set over and otherwise convey without recourse to the
trustee in trust for the benefit of the holders all right, title and interest of
the seller in and to each home equity loan and all its right, title and interest
in and to principal received and interest due on each home equity loan on and
after the cut-off date. However, the seller will reserve and retain all its
right, title and interest in and to principal received (including prepayments of
the home equity loans) and interest due on each home equity loan prior to the
cut-off date. As a protective measure only, the seller will also grant to the
depositor and the depositor will also grant to the trustee a security interest
in the trust fund in case the transfer of the home equity loans is considered by
a court of law or equity to be a loan and not a sale.
In connection with the transfer and assignment of the home equity loans,
the seller will be required to:
(i) deliver without recourse to the trustee or a custodian (which may be
an affiliate or agent of the trustee) on behalf of the trustee, on the
date the home equity loans are assigned to the trust fund, with
respect to each of the loans, which will be identified in a schedule
of home equity loans in the relevant agreement:
- the original mortgage note, endorsed in blank or to the order of the
trustee;
- either (1) the original title insurance policy or a copy certified
by the issuer of the title insurance policy or, if not available,
the original title insurance commitment or a copy certified as a
true copy by the closing agent or the seller, (2) if title insurance
is not available in the applicable state, the relevant attorney's
opinion of title, or (3) for home equity loans the original
principal balance of which is $40,000 or less, a property report
describing the status of title to the mortgaged property and a
related indemnity in favor of the seller, issued by a title company
qualified to do business in the jurisdiction where the mortgaged
property is located;
- originals or copies certified by the closing agent or the seller of
all intervening assignments, if any, showing a complete chain of
title from origination to the seller, including warehousing
assignments, if recorded;
- originals of all assumption and modification agreements, if any;
- either the original mortgage, with evidence of recording (if the
original mortgage has been returned to the seller from the
applicable recording office), a copy of the mortgage (if the
original mortgage has not been returned to the seller) certified by
the closing agent or the seller, or a copy of the mortgage certified
by the public recording office in those instances where the original
recorded mortgage has been lost or retained by the recording office;
and
- the original assignment of mortgage to the trustee in recordable
form;
(ii) cause, within 60 days following the date the home equity loans are
assigned to the trust fund, assignments of the mortgages to the
trustee to be submitted for recording in the appropriate
jurisdictions. Alternatively, except as provided in the related
agreement, the seller may furnish to the trustee, any credit enhancer
and the rating agencies, by the date that the home equity loans are
assigned to the trust fund, at the seller's expense, an opinion of
counsel with respect to the
31
relevant jurisdiction that recording is not required to perfect the
trustee's interests in the related home equity loans (in form
satisfactory to the trustee, any credit enhancer and the rating
agencies); and
(iii) deliver (1) the title insurance policy, attorney's opinion of title
or property report, (2) the original mortgages and (3) the recorded
assignments, together with originals or duly certified copies of any
and all prior assignments (other than unrecorded warehouse
assignments), to the custodian on behalf of the trustee within 15
days of receipt by the seller (but in any event, with respect to a
mortgage as to which original recording information has been made
available to the seller, within one year after the date the home
equity loans are assigned to the trust fund).
With respect to up to 50% of the home equity loans, the depositor may
deliver all or a portion of each related mortgage file to the trustee or a
custodian not later than 20 days after the closing date.
The trustee will agree, for the benefit of the holders, to cause the
custodian to review each file with respect to the home equity loans within 45
days after the date that the home equity loans are assigned to the trust fund
(or the date of receipt of any documents delivered to the trustee after the
closing date), to ascertain that all required documents (or certified copies of
documents) have been executed and received. If during this 45-day period the
custodian finds any document constituting a part of a file which is not properly
executed, has not been received or is unrelated to the home equity loans or that
any home equity loan does not conform in a material respect to the description
set forth in the schedule of home equity loans in the relevant agreement, the
custodian will promptly notify the depositor, the seller, the holders and the
credit enhancer, if any. The seller will agree in the related agreement to use
reasonable efforts to remedy a material defect in a document constituting part
of a file of which it is notified by the custodian.
If, however, within 90 days after notice to it with respect to the defect,
the seller has not remedied the defect and the defect materially and adversely
affects the interest in the related home equity loan of the holders or any
credit enhancer, the seller will be required on the next succeeding Monthly
Remittance Date to (or will cause an affiliate of the seller to) (1) substitute
in lieu of the home equity loan a Qualified Replacement Mortgage and deliver the
Substitution Amount to the trustee (to be deemed part of the collections
remitted by the servicer on the Monthly Remittance Date) or (2) purchase the
home equity loan from the trust at a purchase price equal to the applicable Loan
Purchase Price, which will be delivered to the trustee along with the Monthly
Remittance Amount remitted by the servicer on the Monthly Remittance Date. If a
REMIC election is made with respect to the trust fund, no substitution or
purchase of a home equity loan that is not in default or as to which no default
is imminent will be made unless the seller obtains for the trustee and any
credit enhancer a REMIC Opinion acceptable to the trustee and any credit
enhancer.
In addition, the custodian on behalf of the trustee has agreed to undertake
a review during the 12th month after the closing date indicating the current
status of the exceptions previously indicated on the pool certification with
respect to the applicable agreement. After delivery of this final certification,
the custodian, on behalf of the trustee, and the servicer will provide to the
trustee and the credit enhancer, if any, at least monthly, updated
certifications indicating the then current status of exceptions, until all
exceptions have been eliminated.
DEPOSITS TO PRINCIPAL AND INTEREST ACCOUNT AND CERTIFICATE ACCOUNT
Pursuant to the related agreement, the servicer will be required to create
and maintain a Principal and Interest Account, in the name of the trustee, as a
segregated account with one or more depository institutions, which may be
affiliates of the servicer. All funds in the Principal and Interest Account are
required to be held uninvested or invested in eligible investments, as defined
in the related agreement. Any investment of funds in the Principal and Interest
Account must mature or be withdrawable at par on or prior to the next Monthly
Remittance Date. Any investment earnings and losses on funds held in the
Principal and Interest Account are for the account of the servicer, and net
losses must be promptly replenished by the servicer.
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Within two business days of receipt, the servicer will be required to
deposit to the Principal and Interest Account all principal received and
interest due on the home equity loans (net of the servicing fee) on and after
the related cut-off date, including any prepayments of the home equity loans,
any Net Liquidation Proceeds (defined below) and any income from REO properties,
but net of the following:
- Net Liquidation Proceeds to the extent that Net Liquidation Proceeds
exceed the sum of (a) the loan balance of the related home equity loan
immediately prior to liquidation, (b) accrued and unpaid interest on the
home equity loan (net of the servicing fee) to the date of liquidation
and (c) the amount of any reduction of the loan balance of the related
home equity loan by a court in an insolvency proceeding;
- principal (including prepayments of the home equity loans) collected and
interest due on the home equity loans prior to the cut-off date;
- reimbursements for unreimbursed Delinquency Advances and unreimbursed
Servicing Advances (in each case, solely from amounts recovered on the
related home equity loan); and
- reimbursement for amounts deposited in the Principal and Interest Account
representing payments of principal or interest on a home equity loan by a
mortgagor which are subsequently returned by a depository institution as
unpaid.
The servicer may make withdrawals for its own account from the Principal
and Interest Account for the following purposes:
- on each Monthly Remittance Date, to pay itself the servicing fee to the
extent not otherwise retained;
- to withdraw net investment earnings on amounts on deposit in the
Principal and Interest Account;
- to withdraw amounts that have been deposited to the Principal and
Interest Account in error;
- to reimburse itself for unreimbursed Delinquency Advances and
unreimbursed Servicing Advances (in each case, solely from amounts
recovered on the related home equity loan);
- to reimburse itself for nonrecoverable Delinquency Advances to the extent
provided under "Advances; Compensating Interest" below; and
- to clear and terminate the Principal and Interest Account following the
termination of the trust fund.
The servicer will remit to the trustee for deposit in the Certificate
Account the Monthly Remittance Amount (defined below) allocable to a Remittance
Period (defined below) not later than the related Monthly Remittance Date
(defined below). On each distribution date for a series of securities, the
trustee will withdraw amounts from the Certificate Account and make the
distributions with respect to the securities in accordance with the provisions
of the related agreement.
"Monthly Remittance Amount" means as of any Monthly Remittance Date:
- all interest received during the related Remittance Period with respect
to the home equity loans;
- all Compensating Interest (defined under "Advances; Compensating
Interest" below) paid by the servicer on the Monthly Remittance Date;
- the portion of the Loan Purchase Price amounts and Substitution Amounts
relating to interest on the home equity loans paid by the seller or the
servicer on or prior to the Monthly Remittance Date;
- the interest portion of all Net Liquidation Proceeds actually collected
by the servicer with respect to the home equity loans during the related
Remittance Period;
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- the principal actually collected by the servicer with respect to home
equity loans during the related Remittance Period;
- the outstanding principal balance of each home equity loan that was
purchased from the trustee on or prior to the Monthly Remittance Date, to
the extent the outstanding principal balance was actually deposited in
the Principal and Interest Account on or prior to the Monthly Remittance
Date;
- any Substitution Amounts relating to principal delivered by the seller in
connection with a substitution of a home equity loan to the extent these
Substitution Amounts were actually deposited in the Principal and
Interest Account on or prior to the Monthly Remittance Date;
- the principal portion of all Net Liquidation Proceeds actually collected
by the servicer with respect to the home equity loans during the related
Remittance Period; and
- investment losses required to be deposited on the Monthly Remittance
Date.
"Monthly Remittance Date" means the date specified in the related
prospectus supplement on which funds on deposit in the Principal and Interest
Account are remitted to the Certificate Account.
"Net Liquidation Proceeds" means the proceeds of any liquidation of a home
equity loan net of (1) expenses incurred by the servicer (including unreimbursed
Servicing Advances) in connection with the liquidation and (2) unreimbursed
Delinquency Advances relating to the home equity loan.
"Remittance Period" means with respect to any Monthly Remittance Date, the
calendar month preceding the Monthly Remittance Date
ADVANCES; COMPENSATING INTEREST
DELINQUENCY ADVANCES. On each Monthly Remittance Date, the servicer will
be required to advance to the trustee for deposit to the Certificate Account,
out of the servicer's own funds or from collections on any home equity loans
that are not required to be distributed on the distribution date occurring
during the month in which the advance is made (but which will be reimbursed by
the servicer on or before any subsequent Monthly Remittance Date on which the
collection used to make the advance is required to be part of the Monthly
Remittance Amount), any delinquent payment of interest with respect to each
delinquent home equity loan, which was not received on or prior to the last day
of the related Remittance Period and was not already advanced by the servicer.
Advances out of the servicer's own funds are called "Delinquency Advances". The
servicer may reimburse itself for any Delinquency Advances paid from the
servicer's own funds, from late collections on the related home equity loan or
from certain amounts on deposit in the Certificate Account as provided in the
related agreement. The servicer will also be entitled to recover unreimbursed
Delinquency Advances from the proceeds realized upon liquidation of the related
home equity loan.
If the servicer determines in its reasonable business judgment in
accordance with the servicing standards of the related agreement that any
proposed Delinquency Advance if made would not be recoverable, the servicer will
not be required to make a Delinquency Advance with respect to the home equity
loan. To the extent that the servicer previously has made Delinquency Advances
with respect to a home equity loan that the servicer subsequently determines to
be nonrecoverable, the servicer will be entitled to reimbursement for the
Delinquency Advance from collections on any of the home equity loans in the
related trust fund.
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SERVICING ADVANCES. Except to the extent that the servicer determines they
will not be recoverable, the servicer will be required to pay all "out of
pocket" costs and expenses incurred in the performance of its servicing
obligations, including:
- expenditures in connection with a foreclosed home equity loan prior to
its liquidation, including expenditures for real estate property taxes,
hazard insurance premiums, property restoration or preservation;
- the cost of any enforcement or judicial proceedings, including
foreclosures; and
- the cost of the management and liquidation of REO property (including
broker's fees).
These costs and expenses are "Servicing Advances". The servicer may recover
a Servicing Advance from the mortgagor on whose behalf the advance was made to
the extent permitted by the related home equity loan or, if not recovered from
the mortgagor, from proceeds realized upon the liquidation of the related home
equity loan or from certain amounts on deposit in the Certificate Account as
provided in the related agreement. Except as described above, the servicer may
not recover Servicing Advances from the principal and interest payments on any
other home equity loan.
COMPENSATING INTEREST. If any prepayment in full of a home equity loan
occurs during any calendar month, the servicer must deposit any difference
between the interest collected from the mortgagor in connection with the payoff
and the full month's interest at the coupon rate on the home equity loan that
would be due on the related due date for the home equity loan (the "Compensating
Interest") (but not in excess of the aggregate servicing fee for the related
Remittance Period), to the Principal and Interest Account on the next succeeding
Monthly Remittance Date. This Compensating Interest will be included in the
Monthly Remittance Amount to be made available to the trustee on such Monthly
Remittance Date. The servicer will be entitled to reimbursement for any
unreimbursed payments of Compensating Interest from certain amounts on deposit
in the Certificate Account as provided in the related agreement.
OPTIONAL REPURCHASE OF DEFAULTED HOME EQUITY LOANS
Subject to certain limitations contained in the related agreement, the
servicer will have the right and the option, but not the obligation, to purchase
for its own account any home equity loan which becomes delinquent for the number
of consecutive monthly installments set forth in the related prospectus
supplement or any home equity loan as to which enforcement proceedings have been
brought by the servicer. However, the servicer may not purchase a home equity
loan unless it has delivered a REMIC Opinion to any credit enhancer and the
trustee, at its own expense. The purchase price for this home equity loan will
be equal to the Loan Purchase Price, which must be deposited in the Principal
and Interest Account on the next Monthly Remittance Date.
REALIZATION UPON DEFAULTED HOME EQUITY LOANS
The servicer is required to have liquidated any home equity loan relating
to an REO property that has not been liquidated within 35 months of effecting
ownership at a price that the servicer deems necessary to comply with this
requirement, or within a period of time that, in the opinion of counsel
nationally recognized in federal income tax matters, is permitted under the
Code.
HAZARD INSURANCE
The servicer will be required to have hazard insurance maintained with
respect to mortgaged property and to advance sums on account of the premiums if
not paid by the mortgagor if permitted by the terms of the home equity loan.
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SERVICING
Unless otherwise set forth in the related prospectus supplement, the seller
will also serve as the servicer of each home equity loan. The servicer will be
entitled to a periodic servicing fee as compensation in an amount specified in
the prospectus supplement. The servicer may retain the servicing fee from the
interest portion of each monthly payment on the home equity loans. In addition,
the servicer will be entitled to retain, as additional servicing compensation,
prepayment charges, release fees, bad check charges, assumption fees, late
payment charges, prepayment penalties, any other servicing-related fees or Net
Liquidation Proceeds not required to be deposited in the Principal and Interest
Account pursuant to the related agreement, and similar items.
The servicer may assign its obligations under the related agreement,
provided it obtains the written consent of the trustee and any credit enhancer;
however, the assignee must meet the eligibility requirements for a successor
servicer set forth in the related agreement.
GENERAL SERVICING STANDARD
The servicer will be required to service the home equity loans in
accordance with the related agreement and the terms of the home equity loans.
The servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the home equity loans,
and, to the extent the procedures are consistent with the related agreement and
the terms and provisions of any applicable insurance policy, to follow
collection procedures for all home equity loans at least as rigorous as those
described in Fannie Mae's Servicing Guide.
The servicer may in its discretion waive or permit to be waived (if the
waiver or permission is occasioned by the default or reasonably foreseeable
default of a home equity loan or is consistent with the continued treatment of
the homes equity loan as a "qualified mortgage" (as defined in the related
agreement)) any late payment charge, prepayment charge, assumption fee or any
penalty interest in connection with the prepayment of a home equity loan or any
other fee or charge which the servicer would be entitled to retain as additional
servicing compensation. In the event the servicer consents to the deferment of
the due dates for payments due on a home equity loan, the servicer must
nevertheless pay any required Delinquency Advances with respect to the interest
payments extended by the servicer as if the interest portion of the installment
had not been deferred.
The servicer will have the right under the related agreement (upon
receiving the prior written consent of the credit enhancer, if any) to accept
applications of mortgagors for consent to partial releases of mortgages,
alterations and removal, demolition or division of mortgaged properties. No
application for approval may be considered by the servicer unless:
- the provisions of the related mortgage have been complied with;
- the loan-to-value ratio and debt-to-income ratio after any release does
not exceed the loan-to-value ratio and debt-to-income ratio of the home
equity loan on the cut-off date or any later date that the home equity
loan was acquired by the trust;
- any increase in the loan-to-value ratio does not exceed 5% unless
approved in writing by the credit enhancer, if any; and
- the lien priority of the related mortgage is not affected.
The servicer may not agree to any modification, waiver or amendment of any
provision of any home equity loan unless, in the servicer's good faith judgment,
the modification, waiver or amendment would minimize the loss that might
otherwise be experienced with respect to the home equity loan and only in the
event of a payment default with respect to the home equity loan or if a payment
default with respect to the home equity loan is reasonably foreseeable by the
servicer. However, no modification, waiver or
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amendment may extend the maturity date of the home equity loan beyond the date
that is six months after the latest final scheduled distribution date of all the
classes of securities then outstanding issued by the trust fund. Despite any
conflicting provisions in the related agreement, the servicer will be permitted
to modify, waive or amend any provision of a home equity loan if required by
statute or a court of competent jurisdiction to do so.
SUB-SERVICING ARRANGEMENTS
The servicer, with the prior written consent of any credit enhancer, may
under the related agreement enter into sub-servicing agreements with qualified
sub-servicers for any servicing and administration of home equity loans. A
qualified sub-servicer must be in compliance with the laws of each state
necessary to enable it to perform its obligations under the sub-servicing
agreement, have experience servicing home equity loans that are similar to the
home equity loans in the related trust fund and have equity of not less than
$5,000,000 (as determined in accordance with generally accepted accounting
principles).
The servicer will be required to provide notice of the appointment of any
sub-servicer to the trustee, the holders, any credit enhancer and each rating
agency and to obtain confirmation from each rating agency that the appointment
of a sub-servicer will not result in any withdrawal or downgrade of the then-
current ratings on the securities (without giving effect to any credit
enhancement provided by the credit enhancer). A sub-servicing agreement will not
relieve the servicer of its obligations under the related agreement, and the
servicer's obligations will be the same as if it alone were servicing and
administering the home equity loans. The servicer will be entitled to enter into
any agreement with a sub-servicer for indemnification of the servicer by the
sub-servicer and nothing contained in the sub-servicing agreement will limit or
modify the terms of the related agreement.
CERTAIN MATTERS REGARDING THE SERVICER
The servicer has agreed to indemnify and hold the trustee and any credit
enhancer harmless against any and all claims, losses, penalties, fines,
forfeitures, legal fees and related costs, judgments, and any other costs, fees
and expenses that the trustee and any credit enhancer may sustain in any way
related to the failure of the servicer to perform its duties and service the
home equity loans in compliance with the terms of the related agreement, except
to the extent limited in the related agreement. The servicer must immediately
notify the trustee and any credit enhancer if a claim is made by a third party
with respect to the related agreement, and the servicer must assume the defense
of any claim and pay all expenses in connection with the claim, including
reasonable counsel fees. It must also promptly pay, discharge and satisfy any
judgment or decree that may be entered against the servicer, the trustee and/or
any credit enhancer with respect to the claim. The trustee must reimburse the
servicer from amounts otherwise distributable on residual interest securities
for the related series for all amounts advanced by the servicer as described in
this paragraph, except when a final nonappealable adjudication determines that
the claim relates directly to the failure of the servicer to perform its duties
in compliance with the related agreement. The indemnification provisions will
survive the termination of the related agreement and the payment of the
outstanding securities.
The servicer will be required to deliver to the trustee, the credit
enhancer, if any, and the rating agencies on or before July 31 of each year:
- an officer's certificate stating that (1) a review of the activities of
the servicer during the preceding calendar year and of performance under
the related pooling and servicing agreement or the sale and servicing
agreement has been made under the officer's supervision, and (2) to the
best of the officer's knowledge, based on his review, the servicer has
fulfilled all its obligations under the related agreement for the year,
or, if there has been a default in the fulfillment of any of the
servicer's obligations, specifying each default known to the officer and
the nature and status of each default including the steps being taken by
the servicer to remedy the default; and
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- a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the credit
enhancer, if any, stating that it has examined the servicer's overall
servicing operations in accordance with the requirements of the Uniform
Single Attestation Program for Mortgage Bankers, and stating its
conclusions relating to its examination.
REMOVAL AND RESIGNATION OF SERVICER
The credit enhancer, if any, or the trustee (with the consent of the credit
enhancer, if any), or, if there is no credit enhancer, the holders of at least
51% of the interests represented by the securities of the series then
outstanding, will have the right, pursuant to the related agreement, to remove
the servicer upon the occurrence of certain events specified in the related
agreement, including:
- certain acts of bankruptcy or insolvency of the servicer;
- certain failures of the servicer to perform its obligations under the
related agreement (which may include certain performance tests related to
the delinquency rate and cumulative losses of the home equity loans,
which tests may be amended or eliminated by the credit enhancer, if any,
without the consent of the holders); or
- the failure of the servicer to cure material breaches of its
representations in the related agreement.
The servicer is not permitted to resign from the obligations and duties
imposed on it under the related agreement except upon determination that its
duties are no longer permissible under applicable law or are in material
conflict by reason of applicable law with any other activities carried on by it,
as long as the activities in question are of a type and nature carried on by the
servicer on the date of the related agreement. Any determination permitting the
resignation of the servicer must be evidenced by an opinion of counsel
confirming these matters, which must be delivered, and reasonably acceptable, to
the trustee and any credit enhancer.
Upon removal or resignation of the servicer, the trustee may solicit bids
for a successor servicer as described in the related agreement. Until a
successor servicer is appointed pursuant to the terms of the related agreement,
the servicer must serve in the capacity of successor servicer. The credit
enhancer, if any, may appoint any successor servicer other than the trustee. If
the credit enhancer does not appoint a successor servicer, the trustee, if it is
unable to obtain a qualifying bid and is prevented by law from acting as
servicer, will be required to appoint or petition a court of competent
jurisdiction to appoint any housing and home finance institution, bank or
mortgage servicing institution designated as an approved seller-servicer by
Freddie Mac or Fannie Mae that has equity of not less than $5,000,000, and is
acceptable to any credit enhancer, as the successor to the servicer in the
assumption of all or any part of the responsibilities, duties or liabilities of
the servicer.
No removal or resignation of the servicer will become effective until the
trustee or another successor servicer shall have assumed the servicer's
responsibilities and obligations in accordance with the related agreement.
THE TRUSTEE
The trustee or indenture trustee under each pooling and servicing agreement
or indenture will be named in the related prospectus supplement. The owner
trustee for each series of notes will also be named in the related prospectus
supplement. The commercial bank, national banking association, trust company or
other person serving as trustee, indenture trustee or owner trustee may have
normal banking relationships with the seller, the depositor and the servicer and
their affiliates.
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REPORTING REQUIREMENTS
On each distribution date the trustee will be required to report in writing
(based on information provided to the trustee by the servicer) to each holder,
each rating agency and the credit enhancer, if any:
- the amount of the distribution with respect to each class of securities
(based on a security in the original principal amount of $1,000);
- the amount of the distribution allocable to principal, separately
identifying the aggregate amount of any prepayments in full or partial
prepayments or other recoveries of principal included in the principal
amount paid on the home equity loans (based on a security in the original
principal amount of $1,000);
- the amount of the distribution allocable to interest (based on a security
in the original principal amount of $1,000);
- if the distribution (net of any payment by any credit enhancer) to the
holders of any class of securities on the distribution date was less than
the amounts distributable to these holders on the distribution date, the
related carry-forward amount resulting from the shortfall;
- the amount of any payment by any credit enhancer included in the amounts
distributed to the holders of each class of securities on the
distribution date;
- the principal balance of each class of securities which will be
outstanding after giving effect to any payment of principal on the
distribution date;
- the amount of any overcollateralization amount, target
overcollateralization amount or collateralization deficit remaining after
giving effect to all distributions and transfers on the distribution
date;
- the total of any Substitution Amounts or Loan Purchase Price amounts
included in the distribution;
- the weighted average coupon rate of the home equity loans in the
aggregate or in each home equity loan group (if applicable);
- other information that the credit enhancer or any holder of securities
may reasonably request with respect to delinquent home equity loans;
- the largest home equity loan balance with respect to all the home equity
loans or in each home equity loan group (if applicable);
- the interest rate for each class of securities on the distribution date
and the home equity loan pass-through rate on any securities subject to
an available funds or weighted average coupon limitation;
- during any prefunding period, the loan balance of any home equity loans
added to the trust during the related Remittance Period;
- during any prefunding period, the remaining amounts in the Prefunding
Account as of the last day of the related Remittance Period; and
- any other information specified in the related prospectus supplement or
related agreement.
Certain obligations of the trustee to provide information to the holders
are conditioned upon the trustee's having received the information from the
servicer.
In addition, on each distribution date the trustee will be required to
distribute to each holder, the credit enhancer, if any, and the rating agencies,
together with the information described above, the following information
prepared by the servicer and furnished to the trustee:
- the number and aggregate principal balances of home equity loans (1)
30-59 days delinquent, 60-89 days delinquent, or 90 or more days
delinquent, as of the close of business on the last day of the
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Remittance Period immediately preceding the distribution date, (2) the
number and aggregate loan balances of all home equity loans, as of the
close of business on the last day of the Remittance Period immediately
preceding the distribution date, and (3) the percentage that each of the
amounts specified in clause (1) represents as a percentage of the amounts
specified in clause (2);
- the status and the number and dollar amounts of all home equity loans in
foreclosure proceedings as of the close of business on the last day of
the Remittance Period immediately preceding the distribution date;
- the number of mortgagors and the loan balances of the related mortgages
involved in bankruptcy proceedings as of the close of business on the
last day of the Remittance Period immediately preceding the distribution
date;
- the number of mortgagors and the loan balances of the home equity loans
that are "balloon" loans as of the close of business on the last day of
the Remittance Period immediately preceding the distribution date;
- the existence and status of any REO properties as of the close of
business on the last day of the Remittance Period immediately preceding
the distribution date;
- the book value of any REO properties as of the close of business on the
last day of the Remittance Period immediately preceding the distribution
date;
- the realized losses incurred on the home equity loans for the Remittance
Period immediately preceding the distribution date and the cumulative
realized losses incurred on the home equity loans from the closing date
to and including the Remittance Period immediately preceding the
distribution date; and
- the amount of Net Liquidation Proceeds realized on the home equity loans
during the Remittance Period immediately preceding the distribution date.
REMOVAL OF TRUSTEE FOR CAUSE
The trustee may be removed upon the occurrence of any one of the following
events, whatever the reason for the event and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body:
- failure by the trustee to make distributions of available amounts;
- breaches of covenants and representations by the trustee;
- certain acts of bankruptcy or insolvency on the part of the trustee; or
- failure to meet the standards of trustee eligibility as set forth in the
related agreement.
If any of these events occurs and is continuing, then (1) the credit
enhancer, if any, or (2) with the prior written consent of any credit enhancer
(which may not be unreasonably withheld), the depositor and the holders of a
majority of the interests represented by the securities of the series then
outstanding, or (3) if there are no securities then outstanding, the owners of
the residual interest securities, may appoint a successor trustee.
GOVERNING LAW
The agreements and each security will be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made and
to be performed in New York.
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AMENDMENTS
The trustee, the depositor, the seller and the servicer, with the consent
of the credit enhancer, if any, may, at any time and from time to time and
without notice to or the consent of the holders, amend the related agreements:
- if accompanied by a REMIC Opinion, to remove the restriction against the
transfer of a residual interest security to a "disqualified organization"
(as defined in the Code);
- to comply with the requirements of the Code, including any amendments
necessary to maintain REMIC status;
- to cure any ambiguity;
- to correct or supplement any provision in the related agreement that is
inconsistent with any other provisions in the agreement; or
- for any other purpose, if the amendment will not adversely affect in any
material respect the interest of the holders (an amendment will be deemed
not to have such an effect if it will not result in a reduction of the
rating of the securities of a series without regard to any financial
guaranty insurance policy or other credit enhancement).
In no event may the amendment change in any manner the amount of, or delay
the timing of, payments required to be distributed to any holder without the
consent of that holder, change the percentage interest of the holders required
to consent to any amendment, without the consent of the holders of all
outstanding securities of the class or classes affected, or affect the terms or
provisions of any financial guaranty insurance policy.
TERMINATION OF THE TRUST
Unless otherwise specified in the related prospectus supplement, the
related agreement will provide that the trust will terminate upon the payment to
the holders (from amounts other than those available under any financial
guaranty insurance policy) of all amounts required to be paid to the holders
upon the later to occur of:
- the final payment or other liquidation of the last home equity loan in
the trust fund (or any advance made with respect to the home equity
loan);
- the disposition of all property acquired in respect of any home equity
loan remaining in the trust fund; and
- any time that an optional termination of the trust is effected as
described below under "--Optional Termination".
To effect an optional termination, the trustee must be furnished with an
opinion of counsel experienced in federal income tax matters acceptable to the
credit enhancer, if any, and the trustee to the effect that the optional
termination constitutes a "qualified liquidation" under the Code.
OPTIONAL TERMINATION
BY SERVICER OR CREDIT ENHANCER. At its option, the servicer (or, if
specified in the related prospectus supplement, an affiliate of the servicer or
the credit enhancer, if any, if the servicer or such affiliate fails to exercise
its option) may effect an optional termination of the trust (which may also be
referred to as a clean up call) to the extent specified in the related
prospectus supplement either (1) on any date that the aggregate outstanding
principal balance of the securities is 10% (or such other percentage as is
specified in the related agreement) or less than the initial aggregate
outstanding principal balance of the securities or (2) on any date when the
aggregate outstanding loan balance of the home equity loans is 10% (or such
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other percentage as is specified in the related agreement) or less than the sum
of the loan balances of all the home equity loans in the trust as of the date
the home equity loans were transferred to the trust.
The servicer (or affiliate) may effect an optional termination of the trust
by purchasing from the trust fund all (but not fewer than all) remaining home
equity loans, in whole only, and other property acquired by foreclosure, deed in
lieu of foreclosure, or otherwise then constituting the trust fund, at a
purchase price which will equal an amount up to the sum of (a) the greater of
(i) 100% of the fair market value of the home equity loans (disregarding accrued
interest) and (ii) 100% of the then outstanding principal balance of the
securities, plus (b) all accrued and unpaid interest on the securities (other
than any interest rate cap carryover amounts) plus (c) certain reimbursement
amounts. Upon such termination of the trust, the holders will be paid the
principal balance of the securities plus any previously accrued but unpaid
interest on the securities (other than any interest rate cap carryover amounts)
in accordance with the payment priorities described in the related prospectus
supplement, thereby effecting early retirement of the securities.
TERMINATION UPON LOSS OF REMIC STATUS. Following a final determination by
the Internal Revenue Service or by a court of competent jurisdiction, from which
no appeal is taken within the permitted appeal period, or if any appeal is
taken, following a final determination with respect to the appeal from which no
further appeal can be taken, to the effect that the REMIC does not and will no
longer qualify as a "REMIC" pursuant to Section 860D of the Code, the credit
enhancer, if any, or the holders with the consent of the credit enhancer, if
any, may within 30 calendar days following the final determination, direct the
trustee on behalf of the trust fund to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code.
EVENTS OF DEFAULT; TERMINATION UNDER INDENTURE. Events of default under
the indenture for each series of notes include:
- a default for 30 days or more in the payment of any principal of or
interest on any note;
- failure to perform any other covenant of the trust fund in the indenture
which continues for a period of 60 days after notice is given in
accordance with the procedures described in the related prospectus
supplement;
- any representation or warranty made with respect to or affecting the
series by the seller or the trust fund in the indenture or in any
certificate or other writing delivered pursuant to or in connection with
the indenture having been incorrect in any material respect as of the
time made, and the breach is not cured within 60 days after notice is
given in accordance with the procedures described in the related
prospectus supplement;
- certain events of bankruptcy, insolvency, receivership or liquidation of
the seller or the trust fund; or
- any other event of default provided with respect to the notes.
If an event of default with respect to any outstanding notes occurs and is
continuing, either the trustee or the holders of a majority of the then
aggregate outstanding amount of the notes with, if specified in the related
prospectus supplement, the consent of the credit enhancer, may declare the
principal amount (or, if the notes are Zero Coupon Securities, the portion of
the principal amount specified in the terms of that series, as provided in the
related prospectus supplement) of all the notes to be due and payable
immediately. This declaration may, under certain circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding amount of the
notes.
If, following an event of default with respect to any series of notes, the
notes have been declared to be due and payable, the trustee may, in its
discretion, elect to maintain possession of the collateral securing the notes
and to continue to apply distributions on the collateral as if there had been no
declaration of acceleration, if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes as they would
have become due if there had not been any acceleration of payment. In
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addition, the trustee may not sell or otherwise liquidate the collateral
securing the notes of a series following an event of default unless:
- the holders of 100% of the then aggregate outstanding amount of the notes
consent to the sale;
- the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest due and unpaid on the outstanding notes
at the date of the sale; or
- the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes as those payments would
have become due if the notes had not been accelerated, and the trustee
obtains the consent of the holders of 66 2/3% of the then aggregate
outstanding amount of the notes.
In the event that the trustee liquidates the collateral in connection with
an event of default involving a default for 30 days or more in the payment of
principal of or interest on the notes, the indenture provides that the trustee
will have a prior lien on the proceeds of any liquidation for unpaid fees and
expenses. As a result, upon the occurrence of the event of default, the amount
available for distribution to the noteholders may be less than would otherwise
be the case. However, the trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the event of default.
In the event that the principal of the notes of a series is declared due
and payable as described above, the holders of any notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount of their notes less the amount of the discount which is
unamortized.
Subject to the provisions of the indenture relating to the duties of the
trustee, even if an event of default has occurred and is continuing with respect
to a series of notes, the trustee will be under no obligation to exercise any of
the rights or powers under the indenture at the request or direction of any of
the holders of notes of the series, unless the holders have offered to the
trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with the request or
direction of the holders. Subject to these provisions for indemnification and
certain other limitations contained in the indenture, the holders of a majority
of the then aggregate outstanding amount of the notes of the series will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the trustee or exercising any trust or power conferred
on the trustee with respect to the notes. The holders of a majority of the then
aggregate outstanding amount of the notes may, in certain cases, waive any
default with respect to the notes, except a default in the payment of principal
or interest or a default in respect of a covenant or provision of the indenture
that cannot be modified without the waiver or consent of all the holders of the
outstanding notes affected.
The indenture will be discharged with respect to a series of notes (except
with respect to certain continuing rights specified in the indenture) upon the
delivery to the trustee for cancellation of all the notes of the series or, with
certain limitations, upon deposit with the trustee of funds sufficient for the
payment in full of all of the notes of the series.
In addition to this discharge, with certain limitations, the indenture will
provide that, if specified with respect to the notes of any series, the related
trust fund will be discharged from any and all obligations with respect to the
notes of the series (except for certain obligations relating to temporary notes
and exchange of notes, to register the transfer of or exchange notes of the
series, to replace stolen, lost or mutilated notes of the series, to maintain
paying agencies and to hold monies for payment in trust) upon the deposit with
the trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America which, through the payment of
interest and principal in accordance with their terms, will provide money in an
amount sufficient to pay the principal of and each installment of interest on
the notes on the final scheduled distribution date for the notes and any
installment of interest on the notes in accordance with the terms of the
indenture and the notes. In the event of any resulting defeasance and discharge
of the notes, holders of notes would be able to look only to this money and/or
direct obligations for all further payment of principal and interest, if any, on
their notes.
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REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
trust fund may be performed by a REMIC administrator, who may be the seller or
an affiliate of the seller.
CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS
The following discussion contains summaries of certain legal aspects of
home equity loans which are general in nature. Because certain of these legal
aspects are governed by applicable state law (which may differ substantially
from state to state), the summaries do not purport to be complete or to reflect
the laws of any particular state, or to encompass the laws of all states in
which the properties securing the home equity loans are situated.
HOME EQUITY LOANS
The home equity loans for a series will be secured by either mortgages,
deeds of trust, deeds to secure debt or similar security instruments, depending
upon the prevailing practice in the state in which the property subject to a
home equity loan is located. The filing of a mortgage, deed of trust, deed to
secure debt or similar security instrument creates a lien or title interest upon
the real property covered and represents the security for the repayment of an
obligation that is customarily evidenced by a promissory note. The priority of
the liens is important because, among other things, the foreclosure of a senior
lien will extinguish a junior lien, and because the holder of a senior lien
generally will have a right to receive insurance, condemnation or other proceeds
before the holder of a junior lien.
Priority between mortgages and deeds of trust (or other instruments of
record) generally depends in the first instance on the order of filing with the
appropriate government records office. Priority also may be affected by the
express terms of the mortgage or the deed of trust and any subordination
agreement among the lenders.
Although priority among liens on the same property generally depends in the
first instance on the order of filing, there are a number of ways in which a
lien that is a senior lien when it is filed can become subordinate to a lien
filed at a later date. A deed of trust or mortgage generally is not prior to any
liens for real estate taxes and assessments, certain federal liens (including
certain federal criminal liens, environmental liens and tax liens), certain
mechanics and materialmen's liens, and other liens given priority by applicable
law.
There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a home equity loan, the borrower executes a
separate undertaking to make payments on the mortgage note. Under a deed of
trust or similar security instrument, the homeowner or borrower, called the
"grantor," grants the security property to a third-party grantee, called the
"trustee," for the benefit of the lender, called the "beneficiary." The deed of
trust gives the trustee the authority, if the borrower defaults and upon the
instructions of the beneficiary, to sell the security property in a
"foreclosure" or "trustee's sale" and to apply the sale proceeds to the secured
debt. The mortgagee's authority under a mortgage and the trustee's authority
under a deed of trust are governed by the law of the state in which the real
property is located, the express provisions of the mortgage or deed of trust,
and, in some cases, particularly in deed of trust transactions, the directions
of the beneficiary.
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FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action, and
foreclosure of a deed of trust may be accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in effecting
service on necessary parties defendant. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming and expensive. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a receiver or other officer to conduct the sale of the property. In some
states, mortgages may also be foreclosed by advertisement or pursuant to a power
of sale provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by nonjudicial power of
sale.
If a borrower defaults under a loan secured by a deed of trust, the lender
generally may bring suit against the borrower. The lender generally also may
attempt to collect the loan by causing the deed of trust to be enforced against
the property it encumbers. Enforcement of a deed of trust is accomplished in
most cases by a trustee's sale in which the trustee, upon default of the
grantor, and subject to the expiration of applicable cure periods, sells the
security property at a public sale under the terms of the loan documents and
subject to the applicable procedural provisions of state law. In certain states,
the lender must exhaust the security through foreclosure (either judicially or
non-judicially) prior to other efforts to collect the balance of the promissory
note. Whether a lender may thereafter collect on the unpaid balance of the loan
is governed by the anti-deficiency statute in the applicable state governing the
collectibility of deficiency balances.
The trustee's sale generally must be conducted by public auction in the
county or city in which all or some part of the security property is located. At
the sale, the trustee generally requires a bidder to deposit with the trustee a
set amount or a percentage of the full amount of the bidder's final bid in cash
(or an equivalent satisfactory to the trustee) prior to and as a condition to
recognizing the bid, and may conditionally accept and hold these amounts for the
duration of the sale. The beneficiary of the deed of trust generally need not
bid cash at the sale, but may instead make a "credit bid" up to the extent of
the total amount due under the deed of trust, including costs and expenses
actually incurred in enforcing the deed of trust, as well as the trustee's fees
and expenses. The trustee will sell the security property to the highest proper
bidder at the sale.
A sale conducted in accordance with the terms of the power of sale
contained in the deed of trust generally is presumed to be conducted regularly
and fairly, and, on a conveyance of the property by trustee's deed, confers
absolute legal title to the property to the purchaser, free of all junior deeds
of trust and free of all other liens and claims subordinate to the deed of trust
under which the sale is made. The purchaser's title, however, is subject to all
senior liens and other senior claims. Thus, if the deed of trust being enforced
is a junior deed of trust, the trustee will convey title to the property to the
purchaser subject to the first deed of trust and any other prior liens and
claims. A trustee's sale or judicial foreclosure under a junior deed of trust
generally has no effect on the first deed of trust, with the possible exception
of the right of a senior beneficiary to accelerate its indebtedness under a
default clause or a "due-on-sale" clause contained in the senior deed of trust.
We refer you to "--Due-on-Sale Clauses in Home Equity Loans" below for more
detail.
The proceeds received by the trustee from the sale generally are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the deed of trust under which the sale was conducted.
Any remaining proceeds generally are payable to the holders of junior deeds of
trust and other liens and claims in order of their priority. Any balance
remaining generally is payable to the grantor. Following the sale, if there are
insufficient proceeds to repay the secured debt, the beneficiary under the
foreclosed lien generally may obtain a deficiency judgment against the grantor.
See "--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
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Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under deeds of trust receive
notices in addition to the statutorily prescribed minimum. For the most part,
the courts in these cases have upheld the notice provisions and procedures
described above.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action is equitable in nature, the court may exercise equitable
powers to relieve a mortgagor of a default and deny the mortgagee foreclosure on
proof that either the mortgagor's default was excusable or the mortgagee's
action established a waiver, fraud, bad faith, or oppressive or unconscionable
conduct such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where the default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and within
one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title to and other facts about the
property and because the physical condition of the property may have
deteriorated during the foreclosure proceedings, it is relatively uncommon for a
third party to purchase the property at a foreclosure sale. Rather, it is more
common for the lender to purchase the property from the trustee or referee for
an amount which may be equal to the unpaid principal amount of the mortgage note
secured by the mortgage or deed of trust plus accrued and unpaid interest and
the expenses of foreclosure, in which event the mortgagor's debt will be
extinguished or the lender may purchase for a lesser amount in order to preserve
its right against a borrower to seek a deficiency judgment in states where a
deficiency judgment can be obtained. Afterward, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender (or other purchaser at the foreclosure sale) will assume the burdens
of ownership, including servicing any senior mortgage or deed of trust,
obtaining hazard insurance, paying taxes and making any repairs at its own
expense necessary to render the property suitable for sale. The lender commonly
will attempt to resell the property and will obtain the services of a real
estate broker and pay the broker's commission in connection with the resale.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may be
reduced by the receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after foreclosure of a mortgage, the mortgagor and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. The right of redemption should be
distinguished from the equity of redemption, which is a statutory or
non-statutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest, expenses of foreclosure and reasonable
expenses incurred in maintaining the property. In other states, redemption may
be authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability
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of the lender to sell the foreclosed property. The exercise of a right of
redemption will defeat the title of any purchaser at a foreclosure sale, or of
any purchaser from the lender subsequent to foreclosure. Consequently the
practical effect of a right of redemption is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
In many states, there is no right to redeem property after a trustee's sale
under a deed of trust, unless a deficiency judgment is sought by the lender.
When the lender under a junior mortgage or deed of trust cures the default
and reinstates or redeems the senior mortgage or deed of trust, the amount paid
by the lender for the cure generally becomes a part of the indebtedness secured
by the junior deed of trust.
JUNIOR HOME EQUITY LOANS; RIGHTS OF SENIOR HOME EQUITY LOANS
The home equity loans included in the trust fund for a series of securities
will be secured by mortgages or deeds of trust which may be junior to one or
more other mortgages or deeds of trust held by other lenders or institutional
investors. The rights of the trust fund (and therefore the holders of the
securities), as mortgagee under a junior mortgage, are subordinate to those of
the mortgagee under the senior mortgage, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the home equity loan to be sold upon default of the
mortgagor, thus extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior mortgage loan in full and, in some
states, may cure the default and bring the senior mortgage loan current, in
either event adding the amounts expended to the balance due on the junior home
equity loan. In some states, absent a provision in the mortgage or deed of
trust, no notice of default is required to be given to a junior mortgagee. In
addition, as described above, the rights of the trust fund may be or become
subject to liens for real estate taxes and other obligations. Although the
seller generally does not cure defaults under a senior deed of trust or other
lien, it is the seller's standard practice to protect its interest by monitoring
any sale of which it is aware and bidding for property if it determines that it
is in the seller's best interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that used by the seller, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy required to be maintained by the borrower and all awards made
in connection with condemnation proceedings. The lender generally has the right,
subject to the specific provisions of the mortgage or deed of trust securing its
loan, to apply any proceeds and awards to repair of any damage to the security
property or to payment of any indebtedness secured by the mortgage or deed of
trust, in any order that the mortgagee or beneficiary may determine. Thus, in
the event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages or deeds of trust. If
available, proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, will be applied to the junior indebtedness.
Another provision typically found in the form of the mortgage or deed of
trust used by institutional lenders obligates the grantor or mortgagor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to affect
the property or the rights of the mortgagee or beneficiary under the mortgage.
Upon a failure of the grantor or mortgagor to perform any of these obligations,
the mortgagee or beneficiary is given the right to perform the obligation
itself, at its election, with the mortgagor or grantor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf
47
of the mortgagor or grantor. The mortgage or deed of trust typically provides
that all sums so expended by the mortgagee or beneficiary become part of the
indebtedness secured by the mortgage or deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
However, some states calculate the deficiency as the difference between the
outstanding indebtedness and the greater of the fair market value of the
property and the sales price of the property. Other states require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting its security; however, in some of these states,
the lender, following judgment on its personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the federal
Soldiers' and Sailors' Civil Relief Act and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Foreclosure is
permitted during the pendency of this proceeding only with court permission
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through a Chapter 13 rehabilitative plan under the federal bankruptcy code to
cure a monetary default with respect to a loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original loan
payment schedule even though the lender accelerated the loan and the lender has
taken all steps to realize upon its security (as long as no sale of the property
has yet occurred) prior to the filing of the debtor's Chapter 13 petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a home equity loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that modifications may include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule and reducing the lender's security interest to
the value of the residence, thus leaving the lender a general unsecured creditor
for the difference between the value of the residence and the outstanding
balance of the home equity loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications cannot be applied to the terms of a
home equity loan secured by property that is the principal residence of the
debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the federal bankruptcy code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
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bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The federal bankruptcy code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted home equity loan. In addition, substantive requirements
are imposed upon lenders in connection with the origination and the servicing of
home equity loans by numerous federal and some state consumer protection laws.
The laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and
related statutes and regulations. These federal laws impose specific statutory
liabilities upon lenders who originate loans and who fail to comply with the
provisions of the law. In most cases, this liability will affect assignees of
the loans.
DUE-ON-SALE CLAUSES IN HOME EQUITY LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
home equity loan if the borrower sells or transfers, whether voluntarily or
involuntarily, all or part of the real property securing the loan without the
lender's prior written consent. The enforceability of these clauses has been the
subject of legislation or litigation in many states, and in some cases,
typically involving single family residential mortgage transactions, their
enforceability has been limited or denied. In any event, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain exceptions. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of
due-on-sale clauses with respect to home equity that were originated or assumed
during the "window period" under the Garn-St Germain Act which ended in all
cases not later than October 15, 1982, and that were originated by lenders other
than national banks, federal savings institutions and federal credit unions.
Freddie Mac has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of
due-on-sale clauses with respect to certain categories of window period loans.
Also, the Garn-St Germain Act does "encourage" lenders to permit assumption of
loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from the bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
49
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family home equity loans may be prepaid in full or
in part without penalty. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to home equity loans having higher
mortgage rates, may increase the likelihood of refinancing or other early
retirements of these home equity loans.
APPLICABILITY OF USURY LAWS
Many states have usury laws which limit the interest and other amounts that
may be charged under certain loans. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title
V"), provides that state usury limitations will not apply to certain types of
residential first home equity loans originated by certain lenders after March
31, 1980. Similar federal statutes were in effect with respect to home equity
loans made during the first three months of 1980. Title V authorizes any state
to reimpose interest rate limits by adopting, before April 1, 1983, a state law,
or by certifying that the voters of the state have voted in favor of any
provision, constitutional or otherwise, which expressly rejects an application
of the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on home equity loans covered by Title V. State laws apply to residential
second mortgages; however, some state usury limitations do not apply to
residential second mortgages.
ENVIRONMENTAL LEGISLATION
A federal statute, the Comprehensive Environmental Response, Compensation
and Liability Act, and a growing number of state laws impose a statutory lien
for associated costs on property that is the subject of a cleanup action on
account of hazardous wastes or hazardous substances released or disposed of on
the property. A lien of this type generally will have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens, including the lien of a mortgage or deed of
trust. The priority of the environmental lien under federal law depends on the
time of perfection of the federal lien compared to the time of perfection of any
competing liens under applicable state law. In addition, under federal
environmental legislation and possibly under state law in a number of states, a
secured party that takes a deed in lieu of foreclosure or acquires a property at
a foreclosure sale may be liable for the costs of cleaning up a contaminated
site. Although these costs could be substantial, they would probably not be
imposed on a secured lender (such as the applicable trust fund) if it promptly
marketed the foreclosed property for resale. In the event that a trust fund
acquired title to a property securing a home equity loan and cleanup costs were
incurred in respect of the property, the holders of the securities might incur a
delay in the payment if the costs were required to be paid by the trust fund.
50
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service:
- are entitled to have interest rates reduced and capped at 6% per annum,
on obligations (including home equity loans) incurred prior to the
commencement of military service for the duration of military service;
- may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on obligations entered into
prior to military service for the duration of military service; and
- may have the maturity of obligations incurred prior to military service
extended, the payments lowered and the payment schedule readjusted for a
period of time after the completion of military service.
However, these benefits are subject to challenge by creditors. If, in the
opinion of the court, the ability of a person to comply with these obligations
has not been materially impaired by military service, the court may apply
equitable principles accordingly. If a borrower's obligation to repay amounts
otherwise due on a home equity loan included in a trust fund for a series is
relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940, none
of the trust fund, the servicer, the seller, the trustee or the owner trustee
(if applicable) will be required to advance these amounts, and any resulting
loss may reduce the amounts available to be paid to the holders of the
securities of the series.
USE OF PROCEEDS
The depositor will apply all or substantially all of the net proceeds from
the sale of each series of securities for one or more of the following purposes:
- to establish any reserve fund, Prefunding Account or Capitalized Interest
Account;
- to pay costs of structuring and issuing the securities, including the
costs of obtaining credit enhancement; and
- to acquire the home equity loans from the seller, who in turn will use
the proceeds for general corporate purposes.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section sets forth certain federal income tax opinions of Stroock &
Stroock & Lavan LLP, special counsel to the seller ("Federal Tax Counsel") and a
summary, based on the advice of Federal Tax Counsel, of the material federal
income tax consequences of the purchase, ownership and disposition of the
securities offered hereby. The summary focuses primarily upon investors who will
hold securities as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"), but much of the discussion is applicable to other
investors as well. Because tax consequences may vary based on the status or tax
attributes of the owner of a security, prospective investors are advised to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
securities. For purposes of this tax discussion (except with respect to
information reporting, or where the context indicates otherwise), any reference
to the "holder" means the beneficial owner of a security.
The summary is based upon the provisions of and the regulations promulgated
under the Code including, where applicable, proposed regulations, and the
judicial and administrative rulings and decisions
51
now in effect, all of which are subject to change or possible differing
interpretations. The statutory provisions, regulations, and interpretations on
which this interpretation is based are subject to change, and a change could
apply retroactively.
The federal income tax consequences to holders will vary depending on
whether:
- the securities of a series are classified as indebtedness for federal
income tax purposes;
- an election is made to treat the trust fund (or certain assets of the
trust fund) relating to a particular series of securities as a real
estate mortgage investment conduit (REMIC) under the Code;
- the securities represent an ownership interest for federal income tax
purposes in some or all of the assets included in the trust fund for a
series; or
- for federal income tax purposes the trust fund relating to a particular
series of securities is classified as a partnership or is disregarded as
an entity separate from its owner.
The prospectus supplement for each series of securities will specify how
the securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series.
OPINIONS
Federal Tax Counsel is of the opinion that:
(i) if a prospectus supplement indicates that one or more classes of
non-REMIC securities of the related series are to be treated as
indebtedness for federal income tax purposes, assuming that all of the
provisions of the applicable agreement are complied with, the securities so
designated will be considered indebtedness for federal income tax purposes
and, for federal income tax purposes, the related trust fund will not be an
association, publicly traded partnership, or taxable mortgage pool taxable
as a corporation;
(ii) if a prospectus supplement indicates that one or more REMIC
elections will be made with respect to the related trust fund, assuming
that these elections are timely made and all of the provisions of the
applicable agreement are complied with:
- each segregated pool of assets specified as a REMIC in the
agreement will constitute a REMIC for federal income tax purposes;
- the class or classes of securities of the related series which are
designated as "regular interests" in the prospectus supplement will
be considered "regular interests" in a REMIC for federal income tax
purposes; and
- the class of securities of the related series which is designated
as the "residual interest" in the prospectus supplement will be
considered the sole class of "residual interests" in the applicable
REMIC for federal income tax purposes; and
(iii) if a prospectus supplement indicates that a trust fund will be
treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable agreement, the
trust fund will be a grantor trust under Subpart E, Part I of Subchapter J
of the Code and will not be an association taxable as a corporation, and a
holder of the related certificates will be treated for federal income tax
purposes as the owner of an undivided interest in the home equity loans
included in the trust fund.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service ("IRS") or any
third-party.
52
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST SECURITIES)
INTEREST AND ACQUISITION DISCOUNT. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the holder's normal accounting method. Interest (other than original issue
discount ("OID")) on securities (other than Regular Interest Securities) that
are characterized as indebtedness for federal income tax purposes will be
includible in income by holders in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities are referred to in this section collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with OID. The following discussion is
based in part on the rules governing OID which are set forth in Sections
1271-1275 of the Code and the Treasury regulations issued under these provisions
of the Code (the "OID Regulations"). A holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include the OID in gross income as ordinary interest income
as it accrues under a prescribed method which takes into account an economic
accrual of the discount. In general, OID must be included in income in advance
of the receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code. The issue price of a Debt Security is the first price
at which a substantial amount of Debt Securities of that class are sold to the
public (excluding bond houses, brokers, underwriters or wholesalers). If less
than a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the closing date, the issue price for that class will be
treated as the fair market value of the class on the closing date. The stated
redemption price at maturity of a Debt Security includes the original principal
amount of the Debt Security, but generally will not include distributions of
interest if the distributions constitute "qualified stated interest."
Under the OID Regulations, interest payments will not be qualified stated
interest unless the interest payments are "unconditionally payable." The OID
Regulations state that interest is unconditionally payable if reasonable legal
remedies exist to compel timely payment or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment of
interest (other than late payment that occurs within a reasonable grace period)
or nonpayment of interest a remote contingency. It is unclear whether the terms
and conditions of the debt instruments underlying the Debt Securities or of the
Debt Securities themselves are determinative of whether the likelihood of late
payment or non-payment is a remote contingency. Accordingly, Federal Tax Counsel
is unable to opine whether the interest with respect to a Debt Security is
qualified stated interest, and consequently whether a Debt Security has OID as a
result of the failure of the interest to be treated as qualified stated
interest.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between distribution dates but
ends prior to each distribution date. Any interest that accrues prior to the
closing date may be treated under the OID Regulations either as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In these cases, for the sole purpose of determining whether
OID is de minimis, the OID Regulations provide that the stated redemption price
is equal to the instrument's issue price plus the greater of the amount of
foregone interest or the excess (if any) of the instrument's stated principal
amount over its issue price. The term "interest period" may also be used to
refer to the "accrual period" with respect to interest on a class of notes or
certificates.
53
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity of
the Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and the income will be capital gain if the Debt
Security is held as a capital asset. However, accrual method holders may elect
to accrue all de minimis OID as well as market discount under a constant
interest method. See "--Election to Treat All Interest as Original Issue
Discount."
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds the Debt Security, the
sum of the "daily portions' of the OID. The amount of OID includible in income
by a holder will be computed by allocating to each day during a taxable year a
pro rata portion of the OID that accrued during the relevant accrual period. In
the case of a Debt Security that is not a Regular Interest Security and the
principal payments on which are not subject to acceleration resulting from
prepayments on the home equity loans, the amount of OID includible in income of
a holder for an accrual period (generally the period over which interest accrues
on the debt instrument) will equal the product of the yield to maturity of the
Debt Security and the adjusted issue price of the Debt Security, reduced by any
payments of qualified stated interest. The adjusted issue price is the sum of
its issue price plus prior accruals of OID, reduced by the total payments made
with respect to the Debt Security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing these debt
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (1) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (2) events which have occurred before the end of the accrual
period and (3) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a holder to
take into account prepayments with respect to the home equity loans at a rate
that exceeds the Prepayment Assumption, and to decrease (but not below zero for
any period) the portions of OID required to be included in income by a holder of
a Pay-Through Security to take into account prepayments with respect to the home
equity loans at a rate that is slower than the Prepayment Assumption. Although
OID will be reported to holders of Pay-Through Securities based on the
Prepayment Assumption, no representation is made to holders that home equity
loans will be prepaid at that rate or at any other rate.
The seller may adjust the accrual of OID on a class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the home equity loans,
although the OID Regulations do not provide for these adjustments. If the IRS
were to require that OID be accrued without these adjustments, the rate of
accrual of OID for a class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable prospectus supplement
specifies otherwise, the trustee intends, based on the
54
OID Regulations, to calculate OID on these securities as if, solely for the
purposes of computing OID, the separate regular interests were a single debt
instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but a holder who purchases a Debt Security for an amount that
exceeds its adjusted issue price will be entitled (as will an initial holder who
pays more than a Debt Security's issue price) to offset OID by comparable
economic accruals of portions of excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Holders will be required to report
income with respect to their securities under an accrual method without giving
effect to delays and reductions in distributions attributable to a default or
delinquency on the home equity loans, except possibly to the extent that it can
be established that these amounts are uncollectible. As a result, the amount of
income (including OID) reported by a holder in any period could significantly
exceed the amount of cash distributed to the holder in that period. The holder
will eventually be allowed a loss (or will be allowed to report a lesser amount
of income) to the extent that the aggregate amount of distributions on the
securities is reduced as a result of a home equity loan default. However, the
timing and character of these losses or reductions in income are uncertain and,
accordingly, holders of securities should consult their own tax advisors on this
point.
INTEREST WEIGHTED SECURITIES. It is not clear how income should be accrued
on Debt Securities the payments on which consist solely or primarily of a
specified portion of the interest payments on qualified mortgages held by the
REMIC or on home equity loans underlying Pass-Through Securities (defined below)
("Interest Weighted Securities"). The trust fund intends to take the position
that all of the income derived from an Interest Weighted Security should be
treated as OID and that the amount and rate of accrual of the OID should be
calculated by treating the Interest Weighted Security as a Compound Interest
Security. However, in the case of Interest Weighted Securities that are entitled
to some payments of principal and that are Regular Interest Securities the IRS
could assert that income derived from an Interest Weighted Security should be
calculated as if the security were purchased at a premium equal to the excess of
the price paid by the holder for the security over its stated principal amount,
if any. Under this approach, a holder would be entitled to amortize the premium
only if it has in effect an election under Section 171 of the Code with respect
to all taxable debt instruments held by the holder, as described below.
VARIABLE RATE DEBT SECURITIES. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are subject
to special rules. A Variable Rate Debt Security will qualify as a "variable rate
debt instrument" if:
- its issue price does not exceed the total noncontingent principal
payments due under the Variable Rate Debt Security by more than a
specified de minimis amount;
- it provides for stated interest, paid or compounded at least annually, at
(a) one or more qualified floating rates, (b) a single fixed rate and one
or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and
- it does not provide for any principal payments that are contingent, as
defined in the OID Regulations, except the de minimis amount specified
above.
A "qualified floating rate" is any variable rate where the rate variations
can reasonably be expected to measure contemporaneous variations in the cost of
newly borrowed funds in the currency in which the Variable Rate Debt Security is
denominated. A multiple of a qualified floating rate will generally not itself
constitute a qualified floating rate for purposes of the OID Regulations.
However, a variable rate equal to (1) the product of a qualified floating rate
and a fixed multiple that is greater than 0.65 but not more than 1.35 or (2) the
product of a qualified floating rate and a fixed multiple that is greater than
0.65 but not more than 1.35, increased or decreased by a fixed rate will
constitute a qualified floating rate for purposes of the OID Regulations.
55
In addition, under the OID Regulations, two or more qualified floating
rates that can reasonably be expected to have approximately the same values
throughout the term of the Variable Rate Debt Security will be treated as a
single qualified floating rate (a "Presumed Single Qualified Floating Rate").
Two or more qualified floating rates with values within 25 basis points of each
other as determined on the Variable Rate Debt Security's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Nevertheless, a variable rate that would otherwise constitute a qualified
floating rate but which is subject to one or more restrictions such as a cap or
floor, will not be a qualified floating rate for purposes of the OID Regulations
unless the restriction is fixed throughout the term of the Variable Rate Debt
Security or the restriction will not significantly affect the yield of the
Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the IRS in the future. Nevertheless, a variable rate of interest on a Variable
Rate Debt Security will not constitute an objective rate if it is reasonably
expected that the average value of the variable rate during the first half of
the Variable Rate Debt Security's term will be either significantly less than or
significantly greater than the average value of the rate during the final half
of the Variable Rate Debt Security's term. Further, an objective rate does not
include a rate that is based on information that is within the control of or
unique to the circumstances of the issuer or a party related to the issuer. An
objective rate will qualify as a "qualified inverse floating rate" if the
objective rate is equal to a fixed rate minus a qualified floating rate and
variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the qualified floating rate.
The OID Regulations also provide that if a Variable Rate Debt Security
provides for stated interest at a fixed rate for an initial period of less than
one year followed by a variable rate that is either a qualified floating rate or
an objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a "Presumed Single Variable Rate").
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), OID is computed as described above
based on the following:
- stated interest on the Single Variable Rate Debt Security which is
unconditionally payable in cash or property (other than debt instruments
of the issuer) at least annually will constitute qualified stated
interest;
- by assuming that the variable rate on the Single Variable Rate Debt
Security is a fixed rate equal to: (a) in the case of a Single Variable
Rate Debt Security with a qualified floating rate or a qualified inverse
floating rate, the value, as of the issue date, of the qualified floating
rate or the qualified inverse floating rate or (b) in the case of a
Single Variable Rate Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the
reasonably expected yield for the Single Variable Rate Debt Security; and
- the qualified stated interest allocable to an accrual period is increased
(or decreased) if the interest actually paid during an accrual period
exceeds (or is less than) the interest assumed to be paid under the
assumed fixed rate described above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") that qualifies as
a "variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and
56
accrual of OID and qualified stated interest on the Multiple Variable Rate Debt
Security. The OID Regulations generally require that the Multiple Variable Rate
Debt Security be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate Debt Security with a
fixed rate equal to the value of the qualified floating rate or qualified
inverse floating rate, as the case may be, as of the Multiple Variable Rate Debt
Security's issue date. Any objective rate (other than a qualified inverse
floating rate) provided for under the terms of the Multiple Variable Rate Debt
Security is converted into a fixed rate that reflects the yield that is
reasonably expected for the Multiple Variable Rate Debt Security.
In the case of a Multiple Variable Rate Debt Security that qualifies as a
"variable rate debt instrument" and provides for stated interest at a fixed rate
in addition to either one or more qualified floating rates or a qualified
inverse floating rate, the fixed rate is initially converted into a qualified
floating rate (or a qualified inverse floating rate, if the Multiple Variable
Rate Debt Security provides for a qualified inverse floating rate). Under these
circumstances, the qualified floating rate or qualified inverse floating rate
that replaces the fixed rate must be such that the fair market value of the
Multiple Variable Rate Debt Security as of the Multiple Variable Rate Debt
Security's issue date is approximately the same as the fair market value of an
otherwise identical debt instrument that provides for either the qualified
floating rate or qualified inverse floating rate rather than the fixed rate.
Subsequent to converting the fixed rate into either a qualified floating rate or
a qualified inverse floating rate, the Multiple Variable Rate Debt Security is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of OID and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the OID rules to the
"equivalent" fixed rate debt instrument in the manner described above. A holder
of the Multiple Variable Rate Debt Security will account for this OID and
qualified stated interest as if the holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or OID assumed to have been accrued or paid
with respect to the "equivalent" fixed rate debt instrument in the event that
these amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if the Debt
Security were treated as a contingent payment debt obligation.
The IRS has issued final regulations (the "Contingent Regulations")
governing the calculation of OID on instruments having contingent interest
payments. The Contingent Regulations specifically do not apply however to debt
instruments to which Code Section 1272(a)(6) is applicable, such as a Pay-
Through Security. Additionally, the OID Regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6). Until the Treasury issues
guidelines to the contrary, the trustee intends to base its computation of OID
on Pay-Through Securities as described in this prospectus. However, because no
regulatory guidance exists under Code Section 1272(a)(6), there can be no
assurance that this methodology represents the correct manner of calculating
OID.
MARKET DISCOUNT. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the securities are sold, the gain realized. This market discount would
accrue in a manner to be provided in Treasury regulations but, until the
regulations are issued, the market discount would in general accrue either (1)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (2) in the ratio of (a) in the
57
case of securities (or in the case of a Pass-Through Security, as set forth
below, the home equity loans underlying the Security) not originally issued with
OID, stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or (b) in the case of
securities (or, in the case of a Pass-Through Security, as described below, the
home equity loans underlying the Security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the home
equity loans), the excess of interest paid or accrued to purchase or carry a
security (or, in the case of a Pass-Through Security, as described below, the
underlying home equity loans) with market discount over interest received on the
security is allowed as a current deduction only to the extent the excess is
greater than the market discount that accrued during the taxable year in which
the interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when the market discount is included in
income, including upon the sale, disposition, or repayment of the Debt Security
(or in the case of a Pass-Through Security, an underlying home equity loan). A
holder may elect to include market discount in income currently as it accrues,
on all market discount obligations acquired by the holder during the taxable
year the election is made and thereafter, in which case the interest deferral
rule will not apply.
PREMIUM. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on the security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the securities have been issued, the
legislative history of the Tax Reform Act of 1986 indicates that premium is to
be accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a class of Pay-Through Securities will be calculated
using the prepayment assumption used in pricing the class. If a holder makes an
election to amortize premium on a Debt Security, the election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
afterwards by the holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
Current treasury regulations (the "Amortizable Bond Premium Regulations")
dealing with amortizable bond premium specifically do not apply to prepayable
debt instruments subject to Code Section 1272(a)(6) such as the Pay-Through
Securities. Absent further guidance from the IRS, the trustee intends to account
for amortizable bond premium in the manner described above. Prospective
purchasers of the securities should consult their tax advisors regarding the
possible application of the Amortizable Bond Premium Regulations.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or OID) and premium in income as interest,
based on a constant yield method for Debt Securities acquired on or after April
4, 1994. If an election were to be made with respect to a Debt Security with
market discount, the holder of the Debt Security would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that the holder of the Debt
Security acquires during the year of the election or thereafter. Similarly, a
holder of a Debt Security that makes this election for a Debt Security that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
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SALE OR EXCHANGE. A holder's tax basis in its Debt Security is the price
the holder pays for a Debt Security, plus amounts of OID or market discount
included in income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss recognized on
a sale, exchange, or redemption of a Debt Security, measured by the difference
between the amount realized and the Debt Security's basis as so adjusted, will
generally be capital gain or loss, assuming that the Debt Security is held as a
capital asset. In the case of a Debt Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Debt Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of (1) the amount that would have been includible in the
holder's income if the yield on the Regular Interest Security had equaled 110%
of the applicable federal rate as of the beginning of the holder's holding
period, over the amount of ordinary income actually recognized by the holder
with respect to the Regular Interest Security.
STATUS OF REGULAR INTEREST SECURITIES
Regular Interest Securities and securities representing a residual interest
in a REMIC ("Residual Interest Securities") (both types of securities
collectively referred to as "REMIC Securities") will be "real estate assets" for
purposes of Section 856(c)(4)(A) of the Code and "loans secured by an interest
in real property" under Section 7701(a)(19)(C) of the Code (assets qualifying
under one or both of those sections, applying each section separately,
"qualifying assets") to the extent that the REMIC's assets are qualifying
assets. However, if at least 95 percent of the REMIC's assets are qualifying
assets, then 100 percent of the REMIC Securities will be qualifying assets.
Similarly, income on the REMIC Securities will be treated as "interest on
obligations secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, subject to the limitations of the preceding two
sentences. In addition to home equity loans, the REMIC's assets will include
payments on home equity loans held pending distribution to holders of REMIC
Securities, amounts in reserve accounts (if any), other credit enhancements (if
any) and possibly buydown funds ("Buydown Funds"). The home equity loans
generally will be qualifying assets under both of the foregoing sections of the
Code. However, home equity loans that are not secured by residential real
property or real property used primarily for church purposes may not constitute
qualifying assets under Section 7701(a)(19)(C)(v) of the Code. In addition, to
the extent that the principal amount of a home equity loan exceeds the value of
the property securing the home equity loan, it is unclear and Federal Tax
Counsel is unable to opine whether the home equity loans will be qualifying
assets. The regulations under Sections 860A through 860G of the Code (the "REMIC
Regulations") treat credit enhancements as part of the mortgage or pool of
mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on loans and held pending distribution to
holders of Regular Interest Securities ("cash flow investments") will be treated
as qualifying assets. It is unclear whether reserve funds or Buydown Funds would
also constitute qualifying assets under either of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each holder on that day. In the case
of a holder of a Regular Interest Security who is an individual or a
"pass-through interest holder" (including certain pass-through entities but not
including real estate investment trusts), these expenses will be deductible only
to the extent that these expenses, plus other "miscellaneous itemized
deductions" of the holder, exceed 2% of the holder's adjusted gross income and
the holder may not be able to deduct these fees and expenses to any extent in
computing its alternative minimum tax liability. In addition, the amount of
itemized deductions otherwise allowable for
59
the taxable year for an individual whose adjusted gross income exceeds the
applicable amount will be reduced by the lesser of (1) 3% of the excess of
adjusted gross income over the applicable amount, or (2) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. For taxable years
beginning after December 31, 1997, in the case of a partnership that has 100 or
more partners and elects to be treated as an "electing large partnership," 70%
of the partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners. The reduction or disallowance of this deduction may have
a significant impact on the yield of the Regular Interest Security to this type
of holder. In general terms, a single class REMIC is one that either (1) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (2) is similar to such a
trust and which is structured with the principal purpose of avoiding the single
class REMIC rules. Unless otherwise stated in the applicable prospectus
supplement, the expenses of the REMIC will be allocated to holders of the
related Residual Interest Securities.
TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
TIERED REMIC STRUCTURES. For certain series of securities, two or more
separate elections may be made to treat designated portions of the related trust
fund as REMICs ("Tiered REMICs") for federal income tax purposes. Solely for
purposes of determining whether the REMIC Securities will be "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on these securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
CALCULATION OF REMIC INCOME. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (1) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on loans and other assets, and (2) deductions, including stated interest and OID
accrued on Regular Interest Securities, amortization of any premium with respect
to home equity loans, and servicing fees and other expenses of the REMIC.
A holder of a Residual Interest Security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the home equity loans or other administrative expenses of the REMIC
for a given taxable year, to the extent that these expenses, when aggregated
with the holder's other miscellaneous itemized deductions for that year, do not
exceed 2% of the holder's adjusted gross income and the holder may not be able
to deduct these fees and expenses to any extent in computing its alternative
minimum tax liability. For taxable years beginning after December 31, 1997, in
the case of a partnership that has 100 or more partners and elects to be treated
as an "electing large partnership," 70% of the partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2%
floor that would otherwise be applicable to individual partners.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the closing
date (generally, the day that the interests are issued). This aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
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The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984. Subject to possible application of the de minimis rules,
the method of accrual by the REMIC of OID income on these loans will be
equivalent to the method under which holders of Pay-Through Securities accrue
OID (i.e., under the constant yield method taking into account the Prepayment
Assumption). The REMIC will deduct OID on the Regular Interest Securities in the
same manner that the holders of the Regular Interest Securities include this
discount in income, but without regard to the de minimis rules.
We refer you to "Taxation of Debt Securities (Including Regular Interest
Securities)" above for more detail.
A REMIC that acquires loans at a market discount must include the market
discount in income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before this date, it is
possible that the premium may be recovered in proportion to payments of loan
principal.
PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include:
- subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
- subject to a limited exception, the sale or other disposition of a cash
flow investment;
- the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
- the receipt of any fees or other compensation for services rendered by
the REMIC.
It is anticipated that a REMIC will not engage in any prohibited
transactions in which it would recognize a material amount of net income. In
addition, subject to a number of exceptions, a tax is imposed at the rate of
100% on amounts contributed to a REMIC after the closing date. The holders of
Residual Interest Securities will generally be responsible for the payment of
any of these taxes imposed on the REMIC. To the extent not paid by these holders
or otherwise, however, these taxes will be paid out of the trust fund and will
be allocated pro rata to all outstanding classes of securities of the REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Residual Interest Security will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which the holder held the Residual Interest Security.
The daily portion is determined by allocating to each day in any calendar
quarter its ratable portion of the taxable income or net loss of the REMIC for
the quarter, and by allocating that amount among the holders (on that day) of
the Residual Interest Securities in proportion to their respective holdings on
that day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to this income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the home equity loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on Regular
61
Interest Securities issued without any discount or at an insubstantial discount.
(If this occurs, it is likely that cash distributions will exceed taxable income
in later years.) Taxable income may also be greater in earlier years of certain
REMIC issues as a result of the fact that interest expense deductions, as a
percentage of outstanding principal on Regular Interest Securities, will
typically increase over time as lower yielding securities are paid, whereas
interest income with respect to loans will generally remain constant over time
as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of a corporate
bond or stripped instrument.
LIMITATION ON LOSSES. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which the loss arises. A holder's basis in a Residual
Interest Security will initially equal the holder's purchase price, and will
subsequently be increased by the amount of the REMIC's taxable income allocated
to the holder, and decreased (but not below zero) by the amount of distributions
made and the amount of the REMIC's net loss allocated to the holder. Any
disallowed loss may be carried forward indefinitely, but may be used only to
offset income of the REMIC generated by the same REMIC. The ability of holders
of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which holders should consult their
tax advisers.
DISTRIBUTIONS. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of the payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of the
excess.
SALE OR EXCHANGE. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and the holder's adjusted
basis in the Residual Interest Security at the time of the sale or exchange.
Except to the extent provided in Treasury regulations, which have not yet been
issued, any loss upon disposition of a Residual Interest Security will be
disallowed if the selling holder acquires any residual interest in a REMIC or
similar mortgage pool within six months before or after the disposition.
EXCESS INCLUSIONS. The portion of the REMIC taxable income of a holder of
a Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on the
holder's federal income tax return. Further, if the holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the holder's excess inclusion income will be
treated as unrelated business taxable income of the holder. In addition, under
Treasury regulations yet to be issued, if a real estate investment trust, a
regulated investment company, a common trust fund, or certain cooperatives were
to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Interest Security is owned
by a foreign person, excess inclusion income is subject to tax at a rate of 30%
which may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations.
We refer you to "Tax Treatment of Foreign Investors" for more detail.
The Small Business Job Protection Act of 1996 eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net operating
losses and other allowable deductions to offset their excess inclusion income
from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates held by thrift
institutions since November 1, 1995.
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In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for the residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum income for a tax year cannot be less than excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have the rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for the quarterly period of
(1) 120% of the long term applicable federal rate on the closing date multiplied
by (2) the adjusted issue price of the Residual Interest Security at the
beginning of the quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded.
We refer you to "--Restrictions on Ownership and Transfer of Residual
Interest Securities" and "Tax Treatment of Foreign Investors" below for more
detail.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "disqualified
organization." Disqualified organizations include the United States, any State
or political subdivision of the United States, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by Sections
1-1399 of the Code, if the entity is not subject to tax on its unrelated
business income. Accordingly, the applicable agreement will prohibit
disqualified organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee has furnished to the trustee an affidavit representing
and warranting that it is neither a disqualified organization nor an agent or
nominee acting on behalf of a disqualified organization.
If a Residual Interest Security is transferred to a disqualified
organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of the Residual Interest Security at the
time of the transfer. In addition, if a disqualified organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual tax
on its allocable share of the excess inclusion income of the REMIC. For taxable
years beginning after December 31, 1997, all partners of certain electing
partnerships having 100 or more partners ("electing large partnerships") will be
treated as disqualified organizations for purposes of the tax imposed on
pass-through entities if these electing large partnerships hold residual
interests in a REMIC. However, the electing large partnership would be entitled
to exclude the excess inclusion income from gross income for purposes of
determining the taxable income of the partners.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not
63
a significant purpose of the transfer. A residual interest will be treated as a
"noneconomic residual interest" unless, at the time of the transfer:
- the present value of the expected future distributions on the residual
interest at least equals the product of (x) the present value of all
anticipated excess inclusions with respect to the residual interest and
(y) the highest corporate tax rate, currently 35 percent; and
- the transferor reasonably expects that for each anticipated excess
inclusion, the transferee will receive distributions from the REMIC, at
or after the time at which taxes on this excess inclusion accrue,
sufficient to pay these taxes.
A significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
(had "improper knowledge") that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A transferor will
be presumed not to have improper knowledge if:
- the transferor conducts, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant
evidence to indicate that the transferee will not continue to pay its
debts as they come due in the future; and
- the transferee represents to the transferor that the transferee
understands that it might incur tax liabilities in excess of any cash
received with respect to the residual interest and intends to pay the
taxes associated with owning the residual interest as they come due.
Proposed Treasury regulations issued on February 4, 2000 (the "New Proposed
Regulations") would modify the safe harbor described above, which, if satisfied,
establishes the presumption that the transferor of a Residual Interest Security
does not have improper knowledge. Under the New Proposed Regulations, a transfer
of a noneconomic residual interest will not qualify under the safe harbor
unless, in addition to satisfying the safe harbor described above, the present
value of the anticipated tax liabilities associated with holding the Residual
Interest Security does not exceed the sum of the present values of (i) any
consideration given to the transferee to acquire the interest, (ii) the expected
future distributions on the interest, and (iii) any anticipated tax savings
associated with holding the interest as the related REMIC generates losses. For
purposes of this calculation, the present values generally are calculated using
a discount rate equal to the applicable federal rate. The New Proposed
Regulations indicate that the effective date for the modification of the safe
harbor if finalized will be February 4, 2000.
A different formulation of these transfer restriction rules applies to
transfers of Residual Interest Securities by or to foreign transferees.
We refer you to "Tax Treatment of Foreign Investors" for more detail.
MARK TO MARKET RULES. Treasury regulations provide that any Residual
Interest Security acquired after January 3, 1995 is not a security and cannot be
marked to market under Code Section 475.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
GENERAL. As further described below, each holder of a security issued by a
grantor trust (a "Pass-Through Security") must report on its federal income tax
return the gross income from the portion of the
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home equity loans that is allocable to its Pass-Through Security and may deduct
the portion of the expenses incurred or accrued by the trust fund that is
allocable to its Pass-Through Security, at the same time and to the same extent
as these items would be reported by the holder if it had purchased and held
directly this interest in the home equity loans and received or accrued directly
its share of the payments on the home equity loans and incurred or accrued
directly its share of expenses incurred or accrued by the trust fund when those
amounts are received, incurred or accrued by the trust fund.
A holder of a Pass-Through Security that is an individual, estate, or trust
will be allowed deductions for these expenses only to the extent that the sum of
those expenses and the holder's other miscellaneous itemized deductions exceeds
2% of the holder's adjusted gross income. Further, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds a prescribed amount will be reduced by the lesser
of (1) 3% of the excess of adjusted gross income over the prescribed amount, or
(2) 80% of the amount of itemized deductions otherwise allowable for the taxable
year. For taxable years beginning after December 31, 1997, in the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners. Moreover, a holder of a
Pass-Through Security that is not a corporation cannot deduct these expenses for
purposes of the alternative minimum tax (if applicable). These deductions will
include servicing, guarantee and administrative fees paid to the servicer of the
home equity loans. As a result, the trust fund will report additional taxable
income to holders of Pass-Through Securities in an amount equal to their
allocable share of these deductions, and certain holders of Pass-Through
Securities may have taxable income in excess of the cash received.
STATUS OF THE PASS-THROUGH SECURITIES. The Pass-Through Securities will be
"real estate assets" for purposes of Section 856(c)(4)(A) of the Code and "loans
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the trust fund's assets are qualifying assets. The Pass-Through Securities
may not be qualifying assets under any of the foregoing sections of the Code to
the extent that the trust fund's assets include Buydown Funds, reserve funds, or
payments on mortgages held pending distribution to certificateholders. Further,
the Pass-Through Securities may not be "real estate assets" to the extent loans
held by the trust are not secured by real property, and may not be "loans
secured by an interest in real property" to the extent loans held by the trust
are not secured by residential real property or real property used primarily for
church purposes. In addition, to the extent that the principal amount of a loan
exceeds the value of the property securing the loan, it is unclear and Federal
Tax Counsel is unable to opine whether the loans will be qualifying assets.
TAXATION OF PASS-THROUGH SECURITIES UNDER STRIPPED BOND RULES. The federal
income tax treatment of the Pass-Through Securities will depend on whether they
are securities ("Stripped Securities") subject to the "stripped bond" rules of
section 1286 of the Code. The Pass-Through Securities will be Stripped
Securities if stripped interest-only certificates are issued. In addition,
whether or not stripped interest-only certificates are issued, the IRS may
contend that the stripped bond rules apply on the ground that the servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the servicer
or its affiliates, as specified in the applicable prospectus supplement,
represent greater than an arm's length consideration for servicing the home
equity loans and should be characterized for federal income tax purposes as an
ownership interest in the home equity loans. The IRS has taken the position in
Revenue Ruling 91-46 that a retained interest in excess of reasonable
compensation for servicing is treated as a "stripped coupon" under the rules of
Code Section 1286.
If interest retained for the servicer's servicing fee or other interest is
treated as a "stripped coupon," the Pass-Through Securities will either be
subject to the OID rules or the market discount rules. A holder of a
Pass-Through Security will account for any discount on the Pass-Through Security
as market discount rather than OID if either (1) the amount of OID with respect
to the Pass-Through Security was treated as zero under the OID de minimis rule
when the Pass-Through Security was stripped or (2) no more than
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100 basis points (including any amount of servicing in excess of reasonable
servicing) is stripped off from the home equity loans. If neither of the above
exceptions applies, the OID rules will apply to the Pass-Through Securities.
If the OID rules apply, the holder of a Pass-Through Security (whether a
cash or accrual method taxpayer) will be required to report interest income from
the Pass-Through Security in each taxable year equal to the income that accrues
on the Pass-Through Security in that year calculated under a constant yield
method based on the yield of the Pass-Through Security (or, possibly, the yield
of each mortgage underlying the Pass-Through Security) to the holder. This yield
would be computed at the rate (assuming monthly compounding) that, if used in
discounting the holder's share of the payments on the mortgages, would cause the
present value of those payments to equal the price at which the holder purchased
the Pass-Through Security. With respect to certain categories of debt
instruments including "any pool of debt instruments the yield on which may be
affected by reason of prepayments (or to the extent provided in regulations, by
reason of other events)," Section 1272(a)(6) of the Code requires that OID be
accrued based on a prepayment assumption determined in a manner prescribed by
forthcoming regulations. If required to report interest income on the
Pass-Through Securities to the IRS under the stripped bond rules, it is
anticipated that the trustee will calculate the yield of the Pass-Through
Securities based on a representative initial offering price of the Pass-Through
Securities and a reasonable assumed rate of prepayment of the home equity loans
(although the yield may differ from the yield to any particular holder that
would be used in calculating the interest income of the holder). The prospectus
supplement for each series of Pass-Through Securities will describe the
prepayment assumption that will be used for this purpose, but no representation
is made that the home equity loans will prepay at that rate or at any other
rate.
If a home equity loan is prepaid in full, the holder of a Pass-Through
Security acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the home equity loan that is allocable to the Pass-Through
Security and the portion of the adjusted basis of the Pass-Through Security (see
"Sales of Pass-Through Securities" below) that is allocable to the home equity
loan. It is not clear whether any other adjustments would be required to reflect
differences between the prepayment rate that was assumed in calculating yield
and the actual rate of prepayments.
TAXATION OF PASS-THROUGH SECURITIES IF STRIPPED BOND RULES DO NOT
APPLY. If the stripped bond rules do not apply to a Pass-Through Security, then
the holder will be required to include in income its share of the interest
payments on the home equity loans in accordance with its tax accounting method.
In addition, if the holder purchased the Pass-Through Security at a discount or
premium, the holder will be required to account for this discount or premium in
the manner described below. The treatment of any discount will depend on whether
the discount is OID as defined in the Code and, in the case of discount other
than OID, whether this other discount exceeds a de minimis amount. In the case
of OID, the holder (whether a cash or accrual method taxpayer) will be required
to report as additional interest income in each month the portion of this
discount that accrues in that month, calculated based on a constant yield
method. In general it is not anticipated that the amount of OID to be accrued in
each month, if any, will be significant relative to the interest paid currently
on the home equity loans. However, OID could arise with respect to a home equity
loan ("ARM") that provides for interest at a rate equal to the sum of an index
of market interest rates and a fixed number. The OID for ARMs generally will be
determined under the principles discussed in "Taxation of Debt Securities
(Including Regular Interest Securities)--Variable Rate Debt Securities."
The Taxpayer Relief Act of 1997 amended the OID provisions of the Code to
provide that for "any pool of debt instruments, the yield on which may be
affected by reason of prepayments," OID is to be accrued based on a prepayment
assumption determined in a manner prescribed by forthcoming regulations. The
prospectus supplement for each series of Pass-Through Securities will describe
the prepayment assumption that will be used for this purpose, but no
representation is made regarding the actual rate at which prepayments will
occur.
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If discount other than OID exceeds a de minimis amount (described below),
the holder will also generally be required to include in income in each month
the amount of the discount accrued through this month and not previously
included in income, but limited, with respect to the portion of the discount
allocable to any home equity loan, to the amount of principal on the home equity
loan received by the trust fund in that month. Because the home equity loans
will provide for monthly principal payments, this discount may be required to be
included in income at a rate that is not significantly slower than the rate at
which the discount accrues (and therefore at a rate not significantly slower
than the rate at which the discount would be included in income if it were OID).
The holder may elect to accrue the discount under a constant yield method based
on the yield of the Pass-Through Security to the holder (or possibly based on
the yields of each home equity loan). In the absence of such an election, it may
be necessary to accrue the discount under a more rapid straight-line method.
Under the de minimis rule, market discount with respect to a Pass-Through
Security will be considered to be zero if it is less than the product of (1)
0.25% of the principal amount of the home equity loans allocable to the
Pass-Through Security and (2) the weighted average life (in complete years) of
the home equity loans remaining at the time of purchase of the Pass-Through
Security.
If a holder purchases a Pass-Through Security at a premium, the holder may
elect under Section 171 of the Code to amortize the portion of the premium that
is allocable to a home equity loan under a constant yield method based on the
yield of the home equity loan to the holder, provided that the home equity loan
was originated after September 27, 1985. Premium allocable to a home equity loan
originated on or before that date should be allocated among the principal
payments on the home equity loan and allowed as an ordinary deduction as
principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for market discount or
premium would be made based on the scheduled payments on the home equity loans
or taking account of a reasonable prepayment assumption, and Federal Tax Counsel
is unable to opine on this issue.
If a home equity loan is prepaid in full, the holder of a Pass-Through
Security acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the home equity loan that is allocable to the Pass-Through Security and the
portion of the adjusted basis of the Pass-Through Security (see "Sales of
Pass-Through Securities" below) that is allocable to the home equity loan.
Adjustments might be required to reflect differences between the prepayment rate
that was assumed in accounting for discount or premium and the actual rate of
prepayments.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. A holder, other than a holder of a Residual Interest
Security, may, under certain circumstances, be subject to "backup withholding"
at a rate of 31% with respect to distributions or the proceeds of a sale of
securities to or through brokers that represent interest or OID on the
securities. This withholding generally applies if the holder of a security:
- fails to furnish the trustee with its taxpayer identification number
("TIN");
- furnishes the trustee an incorrect TIN;
- fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
- under certain circumstances, fails to provide the trustee or the holder's
securities broker with a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that the holder
is not subject to backup withholding.
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Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain foreign investors, that is, investors
that for United States federal income tax purposes are treated as:
- corporations or partnerships created outside of the United States;
- individuals that are not citizens or residents of the United States; or
- foreign estates or trusts within the meaning of Code Section 7701.
Holders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining the exemption.
Treasury regulations (the "Final Withholding Regulations"), which are
generally effective with respect to payments made after December 31, 2000,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot be reliably associated with appropriate documentation
provided to the payor. All holders should consult their tax advisers regarding
the application of the Final Withholding Regulations.
The trustee will report to the holders and to the servicer for each
calendar year the amount of any "reportable payments" during the year and the
amount of tax withheld, if any, with respect to payments on the securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to trust funds which are
treated as partnerships for federal income tax purposes, unless interest
(including OID) paid on a security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted in
the United States by a foreign investor, the interest will normally qualify as
portfolio interest (except where the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits interest in the issuer, or
a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax.
See "--Tax Consequences to Holders of the Certificates Issued by a
Partnership--Tax Consequences to Foreign Certificateholders." Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from these interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless the rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
foreign investors. Holders of Pass-Through Securities however, may be subject to
withholding to the extent that the home equity loans were originated on or
before July 18, 1984.
Interest and OID of a foreign investor are not subject to withholding if
they are effectively connected with a United States business conducted by the
holder and the holder timely provides an IRS Form 4224. They will, however,
generally be subject to the regular United States income tax.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a non-United States person may
claim exemption from United States federal income tax withholding. All foreign
investors should consult their tax advisors regarding the application of the
Final Withholding Regulations, which are generally effective with respect to
payments made after December 31, 2000.
Payments to holders of Residual Interest Securities who are foreign
investors will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
this income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that
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constitutes excess inclusion income, a holder of a Residual Interest Security
will not be entitled to an exemption from or reduction of the 30% (or lower
treaty rate) withholding tax rule. If the payments are subject to United States
withholding tax, they generally will be taken into account for withholding tax
purposes only when paid or distributed (or when the Residual Interest Security
is disposed of). The Treasury has statutory authority, however, to promulgate
regulations which would require these amounts to be taken into account at an
earlier time in order to prevent the avoidance of tax. These regulations could,
for example, require withholding prior to the distribution of cash in the case
of Residual Interest Securities that do not have significant value.
Under the REMIC Regulations, if a Residual Interest Security has tax
avoidance potential, a transfer of a Residual Interest Security to a foreign
investor will be disregarded for all federal tax purposes. A Residual Interest
Security has tax avoidance potential unless, at the time of the transfer, the
transferor reasonably expects that the REMIC will distribute to the transferee
residual interest holder amounts that will equal at least 30% of each excess
inclusion, and that these amounts will be distributed at or after the time at
which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a foreign investor transfers a
Residual Interest Security to a United States person (that is, a person that is
not a foreign investor), and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of the
Code.
We refer you to "Taxation of Holders of Residual Interest
Securities--Excess Inclusions" for more detail.
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (1) this gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (2) in the case of an individual foreign person, the foreign person
is not present in the United States for 183 days or more in the taxable year.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
If a trust fund is intended to be a partnership for federal income tax
purposes the applicable agreements will provide that the nature of the income of
the trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates
will be structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation, and that no action will be taken that is inconsistent with the
treatment of the trust fund as a partnership (such as election to treat the
trust fund as a corporation for federal income tax purposes). If, however, the
trust fund has a single owner for federal income tax purposes, it will be
treated as a division of its owner and as such will be disregarded as an entity
separate from its owner for federal income tax purposes, assuming no election
will be made to treat the trust fund as a corporation for federal income tax
purposes.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is generally
defined as an entity that meets the following requirements:
(1) the entity is not a REMIC (or, after September 1, 1997, a FASIT);
(2) substantially all of the assets of the entity are debt
obligations, and more than 50 percent of these debt obligations consists of
real estate mortgages (or interests in real estate mortgages);
(3) the entity is the obligor under debt obligations with two or more
maturities; and
(4) payments on the debt obligations on which the entity is the
obligor bear a relationship to the payments on the debt obligations which
the entity holds as assets.
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With respect to requirement (3), the Code authorizes the IRS to provide by
regulations that equity interests may be treated as debt for purposes of
determining whether there are two or more maturities. If the trust fund were
treated as a taxable mortgage pool, it would be ineligible to file consolidated
returns with any other corporation and could be liable for corporate tax.
Treasury regulations do not provide for the recharacterization of equity as debt
for purposes of determining whether an entity has issued debt with two
maturities, except in the case of transactions structured to avoid the taxable
mortgage pool rules. Federal Tax Counsel will deliver its opinion for a trust
fund which is intended to be a partnership for federal income tax purposes, as
specified in the related prospectus supplement, generally to the effect that the
trust fund will not be a taxable mortgage pool. This opinion will be based on
the assumption that the terms of the agreements and related documents will be
complied with, and on Federal Tax Counsel's conclusion that either the number of
classes of debt obligations issued be the trust fund, or the nature of the
assets held by the trust fund will exempt the trust fund from treatment as a
taxable mortgage pool.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
TREATMENT OF THE NOTES AS INDEBTEDNESS. The trust fund will agree, and the
noteholders will agree by their purchase of notes, to treat the notes as debt
for federal income tax purposes. Except as otherwise provided in the related
prospectus supplement, Federal Tax Counsel will advise the seller that the notes
will be classified as debt for federal income tax purposes. Consequently,
holders of notes will be subject to taxation as described in "Taxation of Debt
Securities (Including Regular Interest Securities)" above for Debt Securities
which are not Regular Interest Securities.
POSSIBLE ALTERNATIVE TREATMENT OF THE NOTES. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
notes did not represent debt for federal income tax purposes, the notes might be
treated as equity interests in the trust fund. If so treated, the trust fund
would likely be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain holders. For
example, income to foreign investors generally would be subject to U.S. federal
income tax and U.S. federal income tax return filing and withholding
requirements, income to certain tax-exempt entities would be "unrelated business
taxable income," and individual holders might be subject to certain limitations
on their ability to deduct their share of the trust fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. In the case of a trust fund
intended to qualify as a partnership for federal income tax purposes, the trust
fund and the seller will agree, and the certificateholders will agree by their
purchase of certificates, to treat the trust fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the trust fund, the partners of the partnership being the
certificateholders, and the notes, if any, being debt of the partnership, or if
there is a single certificateholder for federal income tax purposes, to
disregard the trust fund as an entity separate from the certificateholder.
However, the proper characterization of the arrangement involving the
certificates, the notes, the trust fund and the servicer is not clear because
there is no authority on transactions closely comparable to that contemplated in
this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Generally, provided the
certificates are issued at or close to face value, any characterization would
not result in materially adverse tax consequences to certificateholders as
compared to the consequences from treatment of the certificates as equity in a
partnership, described below. The following discussion assumes that the
certificates represent equity interests in a partnership. The following
discussion also assumes that all payments on the certificates are denominated in
U.S. dollars, none of the certificates have interest rates which would qualify
as contingent interest under the OID regulations, and that a series of
securities
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includes a single class of certificates. If these conditions are not satisfied
with respect to any given series of certificates, additional tax considerations
with respect to these certificates will be disclosed in the applicable
prospectus supplement.
PARTNERSHIP TAXATION. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account its allocated share of income, gains, losses,
deductions and credits of the trust fund. The trust fund's income will consist
primarily of interest and finance charges earned on the home equity loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of home equity loans. The trust
fund's deductions will consist primarily of interest and OID accruing with
respect to the notes, servicing and other fees, and losses or deductions upon
collection or disposition of home equity loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
trust agreement and related documents). The trust agreement will provide, in
general, that the certificateholders will be allocated taxable income of the
trust fund for each month equal to the sum of:
(1) the interest that accrues on the certificates in accordance with
their terms for that month, including interest accruing at the Pass-Through
Rate for that month and interest on amounts previously due on the
certificates but not yet distributed;
(2) any trust fund income attributable to discount on the home equity
loans that corresponds to any excess of the principal amount of the
certificates over their initial issue price;
(3) prepayment premium payable to the certificateholders for the
applicable month; and
(4) any other amounts of income payable to the certificateholders for
the applicable month.
This allocation will be reduced by any amortization by the trust fund of
premium on home equity loans that corresponds to any excess of the issue price
of certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the seller. Based on the economic arrangement of
the parties, this approach for allocating trust fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to certificateholders. Moreover, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of this amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay these
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing certificates at different times and at different prices,
certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
If notes are also issued, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the trust fund (including
fees to the servicer but not interest expense) would be miscellaneous itemized
deductions. These deductions might be disallowed to the individual in whole or
in part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that these calculations be made
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separately for each home equity loan, the trust fund might be required to incur
additional expense but it is believed that there would not be a material adverse
effect on certificateholders.
DISCOUNT AND PREMIUM. It is believed that the home equity loans will not
have been issued with OID and, therefore, the trust should not have OID income.
However, the purchase price paid by the trust fund for the home equity loans may
be greater or less than the remaining principal balance of the home equity loans
at the time of purchase. If so, the home equity loan will have been acquired at
a premium or discount, as the case may be. (As indicated above, the trust fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a home equity loan by home equity loan basis.)
If the trust fund acquires the home equity loans at a market discount or
premium, the trust fund will elect to include this discount in income currently
as it accrues over the life of the home equity loans or to offset the premium
against interest income on the home equity loans. As indicated above, a portion
of the market discount income or premium deduction may be allocated to
certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the trust fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the trust fund are sold or exchanged within
a 12-month period. If a termination occurs, the trust fund will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the trust fund as a new partnership. The trust
fund will not comply with certain technical requirements that might apply when a
constructive termination occurs. As a result, the trust fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the trust fund might not be able to
comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates sold.
A certificateholder's tax basis in a certificate will generally equal the
holder's cost increased by the holder's share of trust fund income (includible
in income) and decreased by any distributions received with respect to the
related certificate. In addition, both the tax basis in the certificates and the
amount realized on a sale of a certificate would include the holder's share of
the notes and other liabilities of the trust fund. A holder acquiring
certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in those certificates, and, upon sale or other disposition of
some of the certificates, allocate a portion of the aggregate tax basis to the
certificates sold (rather than maintaining a separate tax basis in each
certificate for purposes of computing gain or loss on a sale of that
certificate).
Any gain on the sale of a certificate attributable to the holder's share of
unrecognized accrued market discount on the home equity loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The trust fund does not expect to have any other assets
that would give rise to special reporting requirements. Thus, to avoid those
special reporting requirements, the trust fund will elect to include market
discount in income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect to those certificates, this excess will
generally give rise to a capital loss upon the retirement of the certificates.
ALLOCATIONS BETWEEN SELLERS AND TRANSFEREES. In general, the trust fund's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the certificateholders in
proportion to the principal amount of certificates owned by them as of the close
of the last day of the applicable month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's
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method of allocation between transferors and transferees may be revised to
conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund currently does not
intend to make an election. As a result, certificateholders might be allocated a
greater or lesser amount of trust fund income than would be appropriate based on
their own purchase price for certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the trust fund. These books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal year
of the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-1 information to nominees that fail to provide
the trust fund with the information statement described below and these nominees
will be required to forward the information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. This information includes (1) the name,
address and taxpayer identification number of the nominee and (2) as to each
beneficial owner:
- the name, address and identification number of the relevant person;
- whether this person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing; and
- certain information on certificates that were held, bought or sold on
behalf of this person throughout the year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under Section 17A of the Securities Exchange Act of 1934 is not
required to furnish any information statement to the trust fund. The information
referred to above for any calendar year must be furnished to the trust fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the trust fund with the information described above may be
subject to penalties.
The seller will be designated as the tax matters partner in the related
trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
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TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to foreign
investors because there is no clear authority dealing with that issue under
facts substantially similar to those described in this prospectus. Although it
is not expected that the trust fund would be engaged in a trade or business in
the United States for these purposes, the trust fund will withhold as if it were
so engaged in order to protect the trust fund from possible adverse consequences
of a failure to withhold. The trust fund expects to withhold pursuant to Section
1446 of the Code on the portion of its taxable income that is allocable to
certificateholders that are foreign investors, as if the income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the trust fund to change its withholding procedures.
Each certificateholder that is a foreign investor might be required to file
a U.S. individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the trust fund's income. A
foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the trust fund taking the position that
no taxes were due because the trust fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a certificateholder
who is a foreign investor generally will be considered guaranteed payments to
the extent the payments are determined without regard to the income of the trust
fund. If these interest payments are properly characterized as guaranteed
payments, then the interest probably will not be considered "portfolio
interest." As a result, certificateholders will be subject to United States
federal income tax and withholding tax at a rate of 30%, unless reduced or
eliminated pursuant to an applicable treaty. In this case, a foreign investor
would only be entitled to claim a refund for that portion of the taxes, if any,
in excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code and, if necessary, adequately demonstrates
this status.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "FEDERAL
INCOME TAX CONSEQUENCES," potential investors should consider the state and
local income tax consequences of the acquisition, ownership and disposition of
the securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the securities.
ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") should consider the fiduciary standards under
ERISA in the context of the plan's particular circumstances before authorizing
an investment of a portion of such plan's assets in the securities. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the
74
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or any
entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan"), are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Section 406 of ERISA and excise taxes and/or other penalties
are imposed upon such persons under ERISA and/or Section 4975 of the Code unless
an exemption applies. The underwriters of the securities, each master servicer
or other servicer, any credit enhancer, the trustee, the indenture trustee and
certain of their affiliates might be considered "parties in interest" or
"disqualified persons" with respect to a Plan. If so, the acquisition, holding
or disposition of securities by or on behalf of such Plan could be considered to
give rise to a "prohibited transaction" within the meaning of ERISA and the Code
unless a statutory, regulatory or administrative exception or exemption is
available.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES
Plan Assets. In 29 C.F.R sec.2510.3-101 (the "Plan Asset Regulations"),
the U.S. Department of Labor ("DOL") has defined what constitutes "plan assets"
for purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an entity,
an undivided portion of the assets of the entity will be considered the assets
of such Plan unless certain exceptions set forth in such Regulations apply. The
certificates offered hereby (the "Certificates") will be deemed an equity
interest for purposes of the Plan Asset Regulations, and the seller can give no
assurance that the Certificates will qualify for any of the exceptions under the
Plan Asset Regulations. As a result, (i) a Plan may be deemed to have acquired
an interest in the assets of the trust fund and not merely an interest in the
Certificates, (ii) the fiduciary investment standards of ERISA could apply to
such assets and (iii) transactions occurring in the course of managing,
operating and servicing the trust fund and its assets might constitute
prohibited transactions, unless a statutory, regulatory or administrative
exemption applies.
UNDERWRITER EXEMPTION
The DOL has issued to each of a number of underwriters of mortgage and
asset-backed securities individual prohibited transaction exemptions each of
which was amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and
was further recently amended pursuant to Prohibited Transaction Exemption
2000-58 ("PTE 2000-58") (collectively, the "Exemption"), which is applicable to
Certificates which meet its requirements whenever one of such underwriters or
their affiliates is the sole underwriter, the manager or co-manager of an
underwriting syndicate or the selling or placement agent for the offering of the
Certificates. The Exemption generally exempts certain transactions from the
application of certain of the prohibited transaction provisions of ERISA and the
Code provided that the conditions set forth in the Exemption are satisfied.
These transactions include (1) the servicing, managing and operation of
investment trusts holding fixed (generally non-revolving) pools of enumerated
categories of assets which include: single-family, mixed-use and multi-family
residential mortgage loans, home equity loans or receivables and (2) the
purchase, sale and holding of securities which represent beneficial ownership
interests in the assets of such trusts.
General Conditions of Exemption. The Exemption sets forth general
conditions which must be satisfied for a transaction involving the purchase,
sale and holding of the Certificates to be eligible for exemptive relief
thereunder.
75
- First, the acquisition of Certificates by Plans must be on terms that are
at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party.
- Second, the assets held by the trust fund must be fully secured (other
than one-to-four family residential mortgage loans and home equity loans
or receivables backing certain types of Certificates, as described
below). (Mortgage loans, home equity loans, obligations and receivables
will be collectively referred to herein as "loans.")
- Third, unless the Certificates are issued in "designated transactions"
(as described below) and are backed by fully-secured loans, they may not
be subordinated.
- Fourth, the Certificates at the time of acquisition by the Plan must
generally be rated in one of the three (or in the case of designated
transactions, four) highest generic rating categories by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc., Moody's Investors
Services, Inc. or Fitch Ratings (each, a "Rating Agency").
- Fifth, the trustee and the indenture trustee generally cannot be
affiliates of any member of the "Restricted Group" which consists of (i)
any underwriter as defined in the Exemption, (ii) the seller, (iii) the
master servicer, (iv) each servicer, (v) the insurer, (vi) the
counterparty of any "interest swap" (as described below) held as an asset
of the trust fund and (vii) any obligor with respect to loans
constituting more than 5% of the aggregate unamortized principal balance
of the loans held in the trust fund as of the date of initial issuance of
the Certificates.
- Sixth, the sum of all payments made to, and retained by, such
underwriters must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to, and
retained by, the seller pursuant to the assignment of the loans to the
related trust fund must represent not more than the fair market value of
such loans; and the sum of all payments made to, and retained by, the
master servicer and any servicer must represent not more than reasonable
compensation for such person's services under the related agreement and
reimbursement of such person's reasonable expenses in connection
therewith.
- Seventh, (i) the investment pool must consist only of assets of the type
enumerated in the Exemption and which have been included in other
investment pools; (ii) securities evidencing interests in such other
investment pools must have been rated in one of the three (or in the case
of designated transactions, four) highest generic rating categories by
one of the Rating Agencies for at least one year prior to a Plan's
acquisition of Certificates; and (iii) securities evidencing interests in
such other investment pools must have been purchased by investors other
than Plans for at least one year prior to a Plan's acquisition of
Certificates.
- Finally, the investing Plan must be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the SEC under the Securities Act of
1933, as amended. The seller assumes that only Plans which are accredited
investors under the federal securities laws will be permitted to purchase
the Certificates.
Recent Amendments to Exemption. PTE 2000-58 (the "Amendment") recently
amended the Exemption to make the acquisition of Certificates by Plans in an
initial offering or in a secondary market transaction, the holding or transfer
of Certificates and the servicing, management and operation of the trust fund
and its assets on or after November 13, 2000 eligible for exemptive relief to a
broader range of Certificates. Prior to such amendment, the Exemption generally
permitted Plans to purchase only unsubordinated Certificates rated within the
highest three generic rating categories backed by secured collateral. Such
Certificates had to be issued by a trust fund which was a grantor trust, REMIC
or a FASIT whose corpus could not include certain types of assets such as
interest-rate swaps.
Types of Trust Funds. The Amendment has expanded the types of permitted
trust funds to include owner-trusts, as well as grantor trusts, REMICs and
FASITs. Owner-trusts are subject to certain
76
restrictions in their governing documents to ensure that their assets may not be
reached by the creditors of the seller in the event of bankruptcy or other
insolvency and must provide certain legal opinions.
Designated Transactions. In the case where the Certificates are backed by
trust fund assets which are residential, home equity, manufactured housing,
multi-family or commercial loans which are described and defined in the
Exemption as designated transactions ("Designated Transactions"), the Amendment
permits the Certificates issued by the trust fund in such transactions to be
rated in one of the highest four generic rating categories by a Rating Agency
and/or to be subordinated. The assets in the trust funds will be considered
Designated Transactions for purposes of the Exemption unless otherwise specified
in the related prospectus supplement. In addition, one subset of Designated
Transactions, residential (one- to-four family) and home equity loans, may be
less than fully secured, provided that the rights and interests evidenced by
Certificates issued in such Designated Transactions are: (a) not subordinated to
the rights and interests evidenced by securities of the same trust fund; (b)
such Certificates acquired by the Plan have received a rating from a Rating
Agency at the time of such acquisition that is in one of the two highest generic
rating categories; and (c) any loan included in the corpus or assets of the
trust fund is secured by collateral whose fair market value on the closing date
of the Designated Transactions is at least equal to 80% of the sum of: (i) the
outstanding principal balance due under the loan which is held by the trust fund
and (ii) the outstanding principal balance(s) of any other loan(s) of higher
priority (whether or not held by the trust fund) which are secured by the same
collateral.
Insurance Company General Accounts. In the event that Certificates do not
meet the requirements of the Exemption solely because they are subordinate
Certificates or fail to meet a minimum rating requirement under the Exemption,
certain Plans may be eligible to purchase Certificates pursuant to Section III
of Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60") which permits
insurance company general accounts as defined in PTCE 95-60 to purchase such
Certificates if they otherwise meet all of the other requirements of the
Exemption.
Permitted Assets. The Amendment permits an interest-rate swap to be an
asset of a trust fund which issues Certificates acquired by Plans in an initial
offering or in the secondary market on or after November 13, 2000 and clarifies
the requirements regarding yield supplement agreements. An interest-rate swap
(or if purchased by or on behalf of the trust fund) an interest-rate cap
contract (collectively, a "Swap" or "Swap Agreement") is a permitted trust fund
asset if it: (a) is an "eligible Swap;" (b) is with an "eligible counterparty;"
(c) is purchased by a "qualified plan investor;" (d) meets certain additional
specific conditions which depend on whether the Swap is a "ratings dependent
Swap" or a "non-ratings dependent Swap"; and (e) permits the trust fund to make
termination payments to the Swap (other than currently scheduled payments)
solely from excess spread or amounts otherwise payable to the servicer or
seller.
An "eligible Swap" is one which: (a) is denominated in U.S. dollars; (b)
pursuant to which the trust fund pays or receives, on or immediately prior to
the respective payment or distribution date for the class of Certificates to
which the Swap relates, a fixed rate of interest or a floating rate of interest
based on a publicly available index (e.g., LIBOR or the U.S. Federal Reserve's
Cost of Funds Index (COFI)), with the trust fund receiving such payments on at
least a quarterly basis and obligated to make separate payments no more
frequently than the counterparty, with all simultaneous payments being netted
("Allowable Interest Rate"); (c) has a notional amount that does not exceed
either: (i) the principal balance of the class of Certificates to which the Swap
relates, or (ii) the portion of the principal balance of such class represented
by obligations ("Allowable Notional Amount"); (d) is not leveraged (i.e.,
payments are based on the applicable notional amount, the day count fractions,
the fixed or floating rates permitted above, and the difference between the
products thereof, calculated on a one-to-one ratio and not on a multiplier of
such difference) ("Leveraged"); (e) has a final termination date that is either
the earlier of the date on which the issuer terminates or the related class of
Certificates are fully repaid; and (f) does not incorporate any provision which
could cause a unilateral alteration in the interest rate requirements described
above or the prohibition against leveraging.
77
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in one
of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that if a counterparty is
relying on its short-term rating to establish such eligibility, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to buy
such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such fiduciary is either (a) a
"qualified professional asset manager" under Prohibited Transaction Class
Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset manager"
under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23") (see below) or
(c) has total assets (both Plan and non-Plan) under management of at least $100
million at the time the Certificates are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of Certificates
is dependent on the terms and conditions of the Swap), the Swap Agreement must
provide that if the credit rating of the counterparty is withdrawn or reduced by
any Rating Agency below a level specified by the Rating Agency, the servicer
must, within the period specified under the Swap Agreement: (a) obtain a
replacement Swap Agreement with an eligible counterparty which is acceptable to
the Rating Agency and the terms of which are substantially the same as the
current Swap Agreement (at which time the earlier Swap Agreement must
terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the servicer fails to meet these obligations, Plans that hold Certificates
must be notified in the immediately following periodic report which is provided
to certificateholders but in no event later than the end of the second month
beginning after the date of such failure. Sixty days after the receipt of such
report, the exemptive relief provided under the Exemption will prospectively
cease to be applicable to any class of Certificates held by a Plan which
involves such ratings dependent Swap.
"Non-ratings dependent Swaps" (those where the rating of the Certificates
does not depend on the terms and conditions of the Swap) are subject to the
following conditions. If the credit rating of the counterparty is withdrawn or
reduced below the lowest level permitted above, the servicer will, within a
specified period after such rating withdrawal or reduction: (a) obtain a
replacement Swap Agreement with an eligible counterparty, the terms of which are
substantially the same as the current Swap Agreement (at which time the earlier
Swap Agreement must terminate); (b) cause the counterparty to post collateral
with the trust fund in an amount equal to all payments owed by the counterparty
if the Swap transaction were terminated; or (c) terminate the Swap Agreement in
accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement agreement
or similar arrangement (or if purchased by or on behalf of the trust fund an
interest rate cap contract) to supplement the interest rates otherwise payable
on obligations held by the trust fund ("EYS Agreement"). If the EYS Agreement
has a notional principal amount and/or is written on an International Swaps and
Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only be held as
an asset of the trust fund with respect to Certificates purchased by Plans on or
after April 7, 1998 if it meets the following conditions: (a) it is denominated
in U.S. dollars; (b) it pays an Allowable Interest Rate; (c) it is not
Leveraged; (d) it does not allow any of these three preceding requirements to be
unilaterally altered without the consent of the trustee; (e) it is entered into
between the trust fund and an eligible counterparty; and (f) it has an Allowable
Notional Amount.
Pre-Funding Accounts. The Exemption was amended by PTE 97-34 to extend
exemptive relief to Certificates issued in transactions using pre-funding
accounts whereby a portion of the loans backing the
78
Certificates are transferred to the trust fund within a specified period
following the closing date ("DOL Pre-Funding Period") (see below) instead of
requiring that all such loans be either identified or transferred on or before
the closing date. The relief is effective for transactions occurring on or after
May 23, 1997 provided that the following conditions are met.
- First, the ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed 25%.
- Second, all loans transferred after the closing date (referred to here as
"additional loans") must meet the same terms and conditions for
eligibility as the original loans used to create the trust fund, which
terms and conditions have been approved by the Rating Agency.
- Third, the transfer of such additional loans to the trust fund during the
DOL Pre-Funding Period must not result in the Certificates receiving a
lower credit rating from the Rating Agency upon termination of the DOL
Pre-Funding Period than the rating that was obtained at the time of the
initial issuance of the Certificates by the trust fund.
- Fourth, solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "average interest rate") for
all of the loans in the trust fund at the end of the DOL Pre-Funding
Period must not be more than 100 basis points lower than the average
interest rate for the loans which were transferred to the trust fund on
the closing date.
- Fifth, either: (i) the characteristics of the additional loans must be
monitored by an insurer or other credit support provider which is
independent of the seller; or (ii) an independent accountant retained by
the seller must provide the seller with a letter (with copies provided to
the Rating Agency, the underwriter and the trustee) stating whether or
not the characteristics of the additional loans conform to the
characteristics described in the prospectus, prospectus supplement,
private placement memorandum ("Offering Documents") and/or the related
agreement. In preparing such letter, the independent accountant must use
the same type of procedures as were applicable to the loans which were
transferred as of the closing date.
- Sixth, the DOL Pre-Funding Period must end no later than three months or
90 days after the closing date or earlier, in certain circumstances, if
the amount on deposit in the Pre-Funding Account is reduced below the
minimum level specified in the related agreement or an event of default
occurs under the related agreement.
- Seventh, amounts transferred to any Pre-Funding Account and/or
Capitalized Interest Account used in connection with the pre-funding may
be invested only in investments which are permitted by the Rating Agency
and (i) are direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or (ii) have
been rated (or the obligor has been rated) in one of the three highest
generic rating categories by the Rating Agency ("Acceptable
Investments").
- Eighth, certain disclosure requirements must be met.
Revolving Pool Features. The Exemption only covers Certificates backed by
"fixed" pools of loans which require that all the loans must be transferred to
the trust fund or identified at closing (or transferred within the DOL
Pre-Funding Period, if pre-funding meeting the conditions described above is
used). Accordingly, Certificates issued by trust funds which feature revolving
pools of assets will not be eligible for a purchase by Plans. However,
securities which are notes backed by revolving pools of assets may be eligible
for purchase by Plans pursuant to certain other prohibited transaction
exemptions. See discussion below in "ERISA Considerations Relating to Notes."
Limitations on Scope of the Exemption. If the general conditions of the
Exemption are satisfied, the Exemption may provide an exemption from the
restrictions imposed by ERISA and the Code in connection with the initial
acquisition, transfer or holding, and the acquisition or disposition in the
79
secondary market, of the Certificates by Plans. However, no exemption is
provided from the restrictions of ERISA for the acquisition or holding of a
Certificates on behalf of an "Excluded Plan" by any person who is a fiduciary
with respect to the assets of such Excluded Plan. For those purposes, an
Excluded Plan is a Plan sponsored by any member of the Restricted Group. In
addition, each Plan's investment in each class of Certificates cannot exceed 25%
of the outstanding Certificates in the class, and after the Plan's acquisition
of the Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust fund containing
assets which are sold or serviced by the same entity. Finally, in the case of
initial issuance (but not secondary market transactions), at least 50% of each
class of Certificates, and at least 50% of the aggregate interests in the trust
fund, must be acquired by persons independent of the Restricted Group.
ERISA CONSIDERATIONS RELATING TO NOTES
Under the Plan Asset Regulations, the assets of the trust fund would be
treated as "plan assets" of a Plan for the purposes of ERISA and the Code only
if the Plan acquires an "equity interest" in the trust fund and none of the
exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the notes offered hereby
(the "Notes") are treated as indebtedness without substantial equity features
for purposes of the Plan Asset Regulations, then such Notes will be eligible for
purchase by Plans. However, without regard to whether the Notes are treated as
an "equity interest" for such purposes, the acquisition or holding of Notes by
or on behalf of a Plan could be considered to give rise to a prohibited
transaction if the trust fund or any of its affiliates is or becomes a party in
interest or disqualified person with respect to such Plan, or in the event that
a Note is purchased in the secondary market and such purchase constitutes a sale
or exchange between a Plan and a party in interest or disqualified person with
respect to such Plan. There can be no assurance that the trust fund or any of
its affiliates will not be or become a party in interest or a disqualified
person with respect to a Plan that acquires Notes.
The Amendment to the Exemption permits trust funds which are grantor
trusts, owner-trusts, REMICs or FASITs to issue Notes, as well as Certificates,
provided a legal opinion is received to the effect that the noteholders have a
perfected security interest in the trust fund's assets. The exemptive relief
provided under the Exemption for any prohibited transactions which could be
caused as a result of the operation, management or servicing of the trust fund
and its assets would not be necessary with respect to Notes with no substantial
equity features which are issued as obligations of the trust fund. However,
effective for the acquisition, holding or transfer of Notes between a Plan and a
party in interest which occurs on or after November 13, 2000, the Exemption
would provide prohibited transaction exemptive relief, provided that the same
conditions of the Exemption described above relating to Certificates are met
with respect to the Notes. The same limitations of such exemptive relief
relating to acquisitions of Certificates by fiduciaries with respect to Excluded
Plans would also be applicable to the Notes as described herein in "Limitations
on Scope of the Exemption."
In the event that the Exemption is not applicable to the Notes, one or more
other prohibited transactions exemptions may be available to Plans purchasing or
transferring the Notes depending in part upon the type of Plan fiduciary making
the decision to acquire the Notes and the circumstances under which such
decision is made. These exemptions include, but are not limited to, Prohibited
Transaction Class Exemption 90-1 (regarding investments by insurance company
pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might be
construed as prohibited transactions.
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EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON THE EXEMPTION, THE
INVESTOR-BASED EXEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF A PLAN SHOULD
ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO PURCHASE
SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH RESPECT
TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE OF THE
ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental plans and church plans as defined in ERISA are not subject to
ERISA or Code Section 4975, although they may elect to be qualified under
Section 401(a) of the Code and exempt from taxation under Section 501(a) of the
Code and would then be subject to the prohibited transaction rules set forth in
Section 503 of the Code. In addition, governmental plans may be subject to
federal, state and local laws which are to a material extent similar to the
provisions of ERISA or Code Section 4975. A fiduciary of a governmental plan
should make its own determination as to the propriety of an investment in
securities under applicable fiduciary or other investment standards and the need
for the availability of any exemptive relief under any such similar law.
LEGAL INVESTMENT
The securities will not constitute "mortgage-related securities" within the
meaning of the Secondary Mortgage Market Enhancement Act of 1984 unless the
related prospectus supplement specifies that the securities will constitute
"mortgage related securities." Accordingly, investors whose investment authority
is subject to legal restrictions should consult their own legal advisors to
determine whether and the extent to which the securities constitute legal
investments for them.
PLAN OF DISTRIBUTION
The securities offered hereby and by the related prospectus supplements
will be offered in series through one or more of the methods described in the
paragraph below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the depositor from the sale.
The depositor intends that securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of the securities of a
particular series may be made through a combination of two or more of these
methods. These methods are as follows:
(1) by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
(2) by placements by the depositor with institutional investors through
dealers; and
(3) by direct placements by the depositor with institutional investors.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, the securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at fixed
public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. The managing underwriter or underwriters
with respect to the offer and sale of the securities of a particular series will
be set forth on the cover of the prospectus supplement relating to the series
and the members of the underwriting syndicate, if any, will be named in the
prospectus supplement.
In connection with the sale of the securities offered, underwriters may
receive compensation from the depositor or from purchasers of such securities in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the securities may be deemed to be
81
underwriters in connection with the securities, and any discounts or commissions
received by them from the depositor and any profit on the resale of offered
securities by them may be deemed to be underwriting discounts and commissions,
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
offered securities of any series will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters will
be obligated to purchase all the securities if any are purchased, other than in
connection with an underwriting on a best efforts basis, and that, in limited
circumstances, the depositor will indemnify the several underwriters and the
underwriters will indemnify the depositor against certain civil liabilities,
including liabilities under the Securities Act of 1933 or will contribute to
payments required to be made in respect thereof.
The prospectus supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of the offering
and any agreements to be entered into between the depositor and purchasers of
offered securities of the series.
The depositor anticipates that the securities offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of offered securities, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be underwriters
within the meaning of the Securities Act of 1933 in connection with reoffers and
resales by them of the offered securities. Holders of offered securities should
consult with their legal advisors in this regard prior to any reoffer or resale.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement, certain
legal matters in connection with the securities will be passed upon for the
seller by Stroock & Stroock & Lavan LLP, New York, New York.
WHERE YOU CAN FIND MORE INFORMATION
The depositor has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, with
respect to the securities. This prospectus, which forms a part of the
registration statement, and the prospectus supplement relating to each series of
securities contain summaries of the material terms of the documents referred to
in the prospectus supplement and this prospectus, but do not contain all of the
information set forth in the registration statement pursuant to the rules and
regulations of the SEC. For further information, we refer investors to the
registration statement and the related exhibits. The registration statement and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the SEC at its Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows, Midwest Regional Office, 500 West Madison Street, Chicago, Illinois
60661; and Northeast Regional Office, 233 Broadway, New York, New York 10279.
The SEC maintains an internet web site that contains reports, proxy and
information statements and other information regarding the registrants that file
electronically with the SEC, including the depositor. The address of the
internet web site is (http://www.sec.gov).
Each trust fund will be required to file certain reports with the SEC
pursuant to the requirements of the Securities Exchange Act of 1934, as amended.
The depositor and the seller may cause each trust fund to suspend filing reports
if and when these reports are no longer required under the Exchange Act.
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus and any prospectus
supplement. Investors should not rely on any information or representations not
contained in this prospectus or any prospectus supplement. This prospectus and
any prospectus supplement do not constitute an offer to sell or a solicitation
of an offer to buy any securities other than the securities offered under this
prospectus and the applicable prospectus
82
supplement and are not an offer of the securities to any person in any state or
other jurisdiction in which an offer would be unlawful. The delivery of this
prospectus does not imply that information contained in the prospectus is
correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with the SEC by or on behalf of the trust fund referred
to in the accompanying prospectus supplement pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and prior to the termination of any offering of the securities issued
by the trust fund will be deemed to be incorporated by reference in this
prospectus and to be a part of this prospectus from the date of the filing of
the documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference in this prospectus should be deemed to be modified
or superseded for all purposes of this prospectus to the extent that a statement
contained in this prospectus (or in the accompanying prospectus supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces the statement. Any statement
modified or superseded in this manner should not be deemed, except as modified
or superseded, to constitute a part of this prospectus.
The trustee on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, on written or oral request, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this prospectus (not including exhibits to the
information that is incorporated by reference unless these exhibits are
specifically incorporated by reference into the information incorporated in this
prospectus). Requests should be directed to the corporate trust office of the
trustee specified in the related prospectus supplement.
83
$423,000,000
(APPROXIMATE)
CENTEX HOME EQUITY LOAN TRUST 2002-B
(LOGO)
CENTEX HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES, SERIES 2002-B
CENTEX HOME EQUITY COMPANY, LLC
as Originator and Servicer
CHEC FUNDING, LLC
as Depositor
---------------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------------
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
GREENWICH CAPITAL MARKETS, INC.
SALOMON SMITH BARNEY
March 13, 2002